max and thread
Some interesting questions are posed re Intel and its future...that also apply to AMD.
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That's the Strange Thing About Intel
By Thomas Lepri
Staff Reporter
8/27/00 1:00 PM ET
Intel's (INTC:Nasdaq - news) performance last week might suggest that interest in its Pentium IV processor is running as high as the stock's boosters have hoped. While the chip giant was giving new details on its next-generation processor at its annual developers forum in San Jose, Calif., its stock was compiling the latest in a string of impressive weekly showings. Having started the week at an all-time high, it managed to add another 3.3%.
But industry observers weren't betraying much excitement over the Pentium IV this week. To hear them tell it, investors shouldn't expect the 1.4 gigahertz chip to have a dramatic effect on sales of the company's microprocessors when it's released late this fall.
"The Pentium IV doesn't do much more than the Pentium III," says SG Cowen's Drew Peck, who maintains a neutral rating on Intel. "One of the reasons why the corporate market has been stagnant for nearly two years is that we're not seeing the major replacement cycles we used to see when next-generation processors are unveiled. It used to be that Intel unveiled new products, and people would upgrade. That's not as much the case today." (SG Cowen has no underwriting relationship with Intel.)
To Peck, that's because the performance of Intel's microprocessors is limited by at least three bottlenecks: software that doesn't make use of the new Pentium's higher speed, the scarcity of communications bandwidth and the x86 architecture, now nearly 20 years old, on which the chip is based.
Intel didn't return a call seeking comment.
Fast, Really Fast
Intel ran a demo last week of the Pentium IV running at a lightening-quick 2 gigahertz, 500 megahertz better than the speed at which it clocked in during its last demo. But most users won't get anywhere near that sort of performance.
"You can run it at 1.4 megahertz, as advertised and marketed," says Peck. "But most of the time it's just clocking mindlessly, waiting for data. It's a rather old architecture modified to eke out a last gram of performance and the marginal returns are getting smaller. That's one of the major challenges that Intel's been facing for several years. That's why they're spending a fortune to diversify and reduce their exposure to the microprocessor business."
Intel has focused its efforts to diversify on the communications market. The company has made more than 20 acquisitions there in the last two years, including Level One, Dialogic and DSP Communications.
That's a good thing, the way Peck sees it. He's worried that the tightness in capacity in the microprocessor business, from which Intel and Advanced Micro Devices (AMD:NYSE - news) are benefiting, will swing to excess capacity next year. A strong footing in the faster-growing specialty chip market could help Intel minimize its exposure to such cyclical downturn.
Significant Opportunities
Receiving much less attention than the Pentium IV was the XScale, the new processor core that Intel unveiled last week. Replacing the company's StrongARM technology, the XScale chip will be built into cell phones, handheld appliances and networking equipment later this year.
Even those who don't think that Intel's main microprocessor business is near its peak recognize that the company could find its most significant opportunities in products like XScale.
"That's something they could have played up more," says Joe Byrne, industry analyst with the Gartner Group, which consults for most of the major semiconductor companies. "It's a real substantive announcement. We're talking about a new product with impressive capabilities. It's not in the traditional PC space for them. It's going to be their flagship embedded processor. It's a big deal."
Still, Intel has a ways to go before that promise is realized. Even with its recent efforts, the communications-chip business provides Intel with less than 20% of its revenue, according to Peck. In the meantime, its fortunes remain yoked to the cycle of demand for personal computers and servers.
"That's the strange thing about Intel," says Peck. "Despite the fact that they're facing some of their biggest challenges in the last 20 years, the stock is selling at an all-time high. It seems very odd. There's some sort of resistance on the part of investors to acknowledge these issues."
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