01:54pm EDT 6-Sep-01 Robertson Stephens (Rothdeutsch, Eric) INTC AMD MU CPQ HW
Pentium 4 a Zero-Sum Game (at least for now) (Part 1 of 2)
September 6, 2001
Technology / Semiconductor Research
I n t e l C o r p o r a t i o n
INTC: $27.47
Rating: Market Perform
Eric Rothdeutsch 415.693.3241
Tai Nguyen 415.248.4670
Change In... Yes/No Was Is
Rating No MP
EPS F2000A No $1.64
EPS F2001E No $0.50
EPS F2002E No $0.60
52-Week Range (NASDAQ) $75.69-22.25
FD Shares Outstanding 6,725.0 MM
Market Cap $184,735.8 MM
Avg Daily Volume (000) 56,096
Book Value/Share 6/01 $5.33
3-Year Est. Growth Rate 10.00%
Dividend/Yield $0.08/ NONE
FY December F2000 A F2001 E F2002 E
EPS
1Q $0.35 $0.16 A $0.13
2Q $0.50 $0.12 A $0.14
3Q $0.41 $0.09 E $0.15
4Q $0.38 $0.13 E $0.18
Year $1.64 $0.50 $0.60
P/E: 16.8x 54.9x 45.8x
Rev (MM) F2000 A F2001 E F2002 E
1Q $8,021.0 $6,677.0 A $6,659.9
2Q $8,300.0 $6,209.6 A $6,793.1
3Q $8,731.0 $6,373.1 E $7,132.7
4Q $8,702.0 $7,010.4 E $7,846.0
Year $33,726.0 $26,270.1 $28,431.7
Eqty Mkt Val/Rev: 5.5x 7.0x 6.5x
Pentium 4 a Zero-Sum Game (at least for now)
Investment Conclusion:
Intel sa 3Q01 seems a challenge from any number of vantage points: steep price
cuts with more on the way, infrastructure issues surrounding the SDRAM/Socket
478 Pentium 4 platform, a rapid death for the Pentium III, all against a
backdrop of weak PC demand. We expect Intel to guide to the lower end of its
prior 3Q01 revenue guidance in its mid-quarter update today after the close,
and we think its accelerated product transition will weigh on revenue and
margin performance in 4Q01 as well. We are maintaining our Market Perform
rating on INTC.
Key Points
* Some optimism, but conservatism abounds. As we continue our tour through
Asia, there is some optimism about motherboard production in Q3 where August
was up about 10% from July and September is expected to be up slightly from
August and a lot of conservatism regarding Q4 demand given little visibility
and a dearth of production orders extending into October and beyond.
* Near term, the Pentium 4 is a zero-sum game, in our view. The Pentium 4
appears poised for a modest ramp once Intel fires the starter s gun on
September 10 to permit Socket 478/synchronous DRAM systems to ship to
customers. We look for Intel to ship about 3 times as many P4s in Q3 (6-7
million) as we estimate it did in Q2 (2.5 million). However, we believe that
higher demand for the P4 is coming at the expense of the P3 which Intel is
phasing out making it a zero-sum game for P4 sales, at least in the near
term, in our view.
* More price cuts just around the corner. On September 10, we expect official
prices for 1.3GHz and 1.4GHz P4s to be cut from $133 to $109 and $119,
respectively, to help purge what we believe are high 423-pin P4 inventories.
Also, we expect another round of price cuts to be implemented next month (see
Chart 1).
* Infrastructure issues should prevent a fast ramp of the Socket 478 P4. It
appears that supplies are very limited for both the new 478-pin socket
required for the 478-pin P4 only one supplier has been qualified and for the
new heat sink that ships with the boxed P4 solution, capping the number of
P4s that can ship this quarter, in our view. Also, supplies of the Socket
478 P4 and the 845 appear to be constrained as they are in the early stages
of their production ramps.
* Chipsets a bright spot. Bookings for Intel s SDRAM-compatible 845 chipset
appear to be robust, providing large share gains on a product where margins
run above the corporate average.
Zero-Sum Game: Better Pentium 4 Sales Seen, But at the Expense of Pentium III
As we continue our tour throughout Asia where we have been meeting with channel
suppliers, there appears to be some optimism about motherboard demand in 3Q01
mixed with a large dose of caution about what 4Q01 will bring. Motherboard
shipments in August were up about 10% from July, and there appears to be a
consensus among motherboard manufacturers that September should bring demand at
least up slightly from levels seen in August. Suppliers are very cautious
about 4Q01 given a lack of visibility and few orders extending that far (orders
for motherboards now are released about 4 weeks ahead of a required delivery
date).
White box market for PCs appears stronger than OEM channels
Numerous manufacturers are seeing strength in the clone, or white box, markets,
particularly in developing regions (such as China, India, Russia, and South
America) and in select European countries (Greece, Italy), allowing them to
gain share from the large PC OEMs, including Compaq (CPQ $10.41), Dell (DELL
$22.38), HP (HWP $18.21), and IBM (IBM $100.35). We think this is due to the
fact that PC components are readily available, allowing local resellers to win
more business given their lower cost overhead versus the large OEMs (the
reverse is true when component supplies are tight when the OEMs have an
advantage in obtaining products at better prices).
Intel to launch new Pentium 4 systems on September 10th
The Pentium 4 appears poised for a modest ramp once Intel fires the starter s
gun on September 10 to permit socket 478/synchronous DRAM (SDRAM) systems to
ship to customers. We look for Intel to ship about 3 times as many P4s in Q3
(6-7 million) as we estimate it did in Q2 (2.5 million). However, we believe
that higher demand for the P4 is coming at the expense of demand for the
P3 which Intel is phasing out making it a zero-sum game for the Pentium 4, at
least in the near term, in our view.
along with additional price cuts...
Also on September 10, we expect the official prices for 1.3GHz and 1.4GHz P4s
to be cut from $133 to $109 and $119, respectively, to help purge what we
believe are high 423-pin P4 inventories (unofficially, we believe deals have
been going down below these prices for at least the last month). Also, we
expect another round of price cuts to be implemented next month (see Chart 1).
which should continue to pressure margins.
We believe that Intel no longer is accepting any Pentium III orders except to
support legacy corporate and government commitments, and we expect Intel to
stop accepting all P3 orders in October. We also believe that Intel has
stopped shipping Pentium IIIs into the channel in order to accelerate the
product transition to the P4. The potential sharp falloff in P3 sales without
a commensurate fast ramp in the Socket 478 platform hampered by limited socket
and heat sink availability should weigh on Intel s margins in the coming
months, as will continuing price cuts and weak overall PC demand. We consider
our 3Q01 EPS estimate of $0.09 to be a best-case estimate given the risk of
continued margin deterioration.
Pentium 4 and Celeron to fill gap vacated by Pentium III.
Intel continues to aggressively cut prices to drive the Pentium 4 into the
mainstream market as well as to move the minimum processor frequency higher in
order to hurt competitor AMD (AMD $12.05), in our view. By the beginning of
2002, we expect the minimum P4 clock speed offered to be 1.5GHz.
To backfill the speed gap created by killing off the P3 and moving the P4
upstream, we expect Intel to ramp the 1.1GHz Celeron into volume production
this quarter, the 1.2GHz Celeron in 4Q01, the 1.3GHz Celeron in 1Q02, and the
1.4GHz Celeron in 2Q02.
Chart 1. Intel Pentium 4 Pricing
Source: Company reports and Robertson Stephens estimates.
Chipsets a bright spot, although DDR systems not available until next year.
Bookings for the SDRAM-compatible chipset, the 845, appear to be robust as it
permits a much lower system cost versus a Rambus solution, albeit with 15%-20%
performance degradation, in our view. We expect Intel to ship in excess of 5
million 845 chipsets this quarter, and at a $42 average selling price, creates
approximately $200 million in incremental revenues at margins we believe to be
above the company average.
Additionally, we think that Intel is playing hardball with major chipset
competitor Via and does not seem particularly inclined to grant Via a license
to the Pentium 4 bus anytime soon. This would prevent a repeat of the large
market share gains achieved by Via on the Pentium III when Intel failed to
execute on its own chipset development while providing Intel with incremental
revenue gains. This also gives Intel leverage to pull through additional P3
chipset sales as long as P3 supplies last.
DDR not in the cards in 2001.
We continue to believe that 845 systems compatible with DDR DRAMs will not be
available until 1Q02. We think the DDR validation process is an arduous one,
and that best case, if the validation achieves early success, we would expect
Intel to announce DDR support at Comdex, to be held in Las Vegas the week of
November 12. However, we continue to believe that Intel will not permit DDR-
based systems to ship until January 2002, thereby capping Pentium 4 system
performance in 2001, while continuing to leave the door open to AMD with its
better-performing DDR-compatible Athlon solutions that are shipping in volume
today.
The Company
Intel Corporation is the world s largest semiconductor supplier, providing
semiconductors, boards, systems, and software used in a variety of computers,
servers, networks, and communications products. In our opinion, Intel holds one
of the most powerful positions in the electronics industry because it controls
the architectural direction and price/performance levels of PCs.
Investment Thesis
We believe that Intel should continue to dominate the MPU market while facing
an environment of limited competition. However, Intel faces a significant
transition to the Pentium 4 processor and ramps of 0.13 micron, copper-
interconnect and 300mm process technologies, creating a substantial risk should
Intel fail to execute successfully. Over the longer term, Intel should increase
its focus on becoming a broad-based communications vendor in addition to a
computer-related silicon supplier.
Investment Risks
Among the risks are competition from X86-architecture, X86 compatible and Power
PC suppliers, the manufacturing challenges and risk involved in a rapid ramp of
manufacturing facilities, the ramp of the new Pentium 4 architecture, the
challenges of implementing the new Socket 478 platform infrastructure including
motherboard, socket, and heat sink support, the ramp of the new 0.13 micron and
300mm process technologies, steep unit and ASP declines in flash memory, and
the slowing growth rate of personal computers. |
