Intel: A growth machine no more
By John Shinal
Last Update: 2:46 PM ET Oct. 12, 2004
SAN FRANCISCO (CBS.MW) -- Tech investors who haven't noticed that the growth torch has passed from middle-aged companies like Intel to Yahoo and other upstarts may want to take a close look at the firms' third-quarter earnings reports.
Both will report after the close of trading Tuesday, and the growth comparison will be stark.
Yahoo's (YHOO: news, chart, profile) quarterly revenue is expected to rise more than 80 percent from a year ago, while Intel will likely post annual growth in the high single digits.
Looking past this quarter is even more instructive.
Analysts expect Intel's 2004 sales to be $33.7 million. In 1999, near the height of the last growth cycle, the company's annual revenue was $29.4 billion.
So if Intel (INTC: news, chart, profile)hits its number this year, it will have posted a five-year average annual sales growth rate of - drum roll, please -- 3 percent.
Yet many on Wall Street - especially those who made big money on tech stalwarts like Intel, Cisco Systems (CSCO: news, chart, profile) and Sun Microsystems (SUNW: news, chart, profile) during the last bull market -still believe those companies will lead the next leg of the tech growth cycle.
But the long history of U.S. markets, like the recent history of Intel, doesn't support that thesis, according to one fund manager.
"In tech, it's all about the new supplanting the old," said Kenneth Broad, who co-manages $1.1 billion in the TransAmerica Premier Growth Opportunities Fund.
The key word in that quote is "old."
Although Intel is arguably one of the most successful innovators in U.S. corporate history, it began making semiconductors the same year Richard Nixon first won the White House.
So while Intel's business depends on being innovative, it is nevertheless an old - and mature -- business.
Some industries move slowly enough so that one firm can dominate for decades - think Coca Cola in retail. Yet tech firms tend to get put out to pasture at a relatively young age, Broad said.
One example he cited: Silicon Graphics (SGI: news, chart, profile), whose work stations were all the rage among graphic designers in the early 1990's, but is now a bit player. "If you look at the SGI stock chart, it's a 20-year round trip," Broad said.
Not that Intel is the same as Silicon Graphics. The firm has consistently used its emphasis on engineering innovation to stay on top of the market for computer chips.
For example, the company's push to make chips for laptops - which are more profitable than those used in desktop PC's - gave it a boost in recent years.
Yet its efforts to branch out into other markets - for communication and networking chips, for example, haven't met with nearly as much success.
So the company still gets the vast majority of its revenue from its core microprocessor business.
And that business has matured.
For that reason, growth investors will have a tough time finding a reason to own the stock.
Those who do may be thinking with their hearts, rather than their wallets.
"People tend to cling to the past," Broad said. With Intel, "they're looking in the rear view mirror."
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