Paul
from CNBC.COM
FMA
***********************************************************
Oct 15 1999 6:01AM ET
More on Winners and Losers...
Microsoft and Intel in a Post-PC World
by Pat Dorsey
Senior Stocks Analyst, Morningstar.com
Special to CNBC.com
The field of technology investing is littered with the remains of companies that missed
fundamental shifts in their business.
Once-proud Digital Equipment is now a subsidiary of not-so-proud Compaq
Computer Corp. {CPQ}. Data General Corp. {DGN} -- the subject of Tracy
Kidder's Pulitzer-prize-winning The Soul of a New Machine -- was recently
bought by EMC Corp. {EMC}. Even mighty IBM {IBM} only missed becoming an
also-ran by the skin of its corporate teeth.
As personal computers are supplanted by information appliances such as smart
phones, TV set-top boxes, and personal assistants, such as the Palm Pilot,
questions have surfaced about the future of Microsoft Corp. {MSFT} and Intel
Corp. {INTC}.
MSFT one-year stock performance
INTC one-year stock performance
Even though the Wintel duo still rules the PC universe, what happens when PCs
are no longer the sole vehicle for gaining access to electronic information and
services? Investors got a small taste of the difficulty that Intel is having in dealing
with the changing PC landscape earlier this week when the company missed
earnings due to lower prices for its chips.
Although I've read more than a few articles recently proclaiming the virtual death
of Wintel at the hands of companies such as Cisco Systems Inc. {CSCO},
Oracle Corp. {ORCL}, and Sun Microsystems Inc. {SUNW}, I think a little Mark
Twain is appropriate here. Reports of the demise of Microsoft and Intel are
greatly exaggerated. The PC will probably be less important in our lives in five
years than it is now, but the management teams of both these companies are
aware of this shift and have already taken steps to reorient their firms' strategies.
Intel has been diversifying away from the PC market into the communications
and networking businesses through acquisitions. And when Intel rolls out the
second generation of low-power StrongARM chips next year, the chip maker will
be able to compete head to head with companies such as IBM and Motorola Inc.
{MOT} in the market for chips for handheld devices. Finally, let's not forget Intel's
line of high-margin Xeon processors for servers and its upcoming Merced line of
next-generation chips for servers. Growth in Web-server shipments isn't about to
slow anytime soon.
Microsoft has also been moving beyond the PC. The company has aggressively
pushed into the markets for both set-top boxes (through its $5 billion investment
in AT&T Corp. {T}) and smart phones (through the Wireless Knowledge joint
venture with Qualcomm Inc. {QCOM}) and a $600 million investment in cellular
carrier Nextel Communications Inc. {NXTL}. On the high end, Microsoft's
much-ballyhooed Windows 2000 operating system is aimed squarely at the
server market, and despite the growing popularity of the free Unix operating
system, it's just a little too early to count Gates & Co. out of the race.
The point here is that when you buy a stock, you're not just buying, in Warren
Buffett's words, "a little wiggling thing with a chart attached." You're buying
partial ownership in a company. You're trusting the firm's management to make
that tiny piece you own more valuable by responding to changes in the market.
Basically, you're buying management talent.
And I don?t know many management teams that are smarter than Bill Gates and
Steve Ballmer or Andy Grove and Craig Barrett.
Of course, smart management doesn't mean squat if the folks running the show
don't have sufficient resources to invest in new ventures and take their firm in
new directions. Remembering that Intel and Microsoft are companies rather than
little wiggling things, let's take a look at their financial statements to see what
kinds of resources they have at their disposal.
Intel has almost $12 billion in cash in the bank and generates more than $5
billion in free cash flow every year. Not bad. The folks at Microsoft are sitting
even prettier, with more than $17 billion in cash and a gargantuan $9 billion in
free cash flow.
Is it possible that Intel and Microsoft will wind up in the silicon scrap-heap of
history? Sure. I can?t predict the future, and neither can Grove nor Gates. But is
it probable that these two powerhouses will become also-rans? Not by a long
shot, and certainly not while their managements are displaying as much vision
and resourcefulness in responding to challenges as they have so far.
Pat Dorsey can be reached at patrick.dorsey@morningstar.com |
