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Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: Fred Fahmy who wrote (84370)	6/23/1999 10:03:00 PM
From: puborectalis	Respond to of 186894

June 23, 1999 Is Intel on the Rocks? By Monica Rivituso Is the Intel (INTC) age over? You'd think so by the speed with which analysts have been shaving earnings estimates and cutting ratings on the company. Since last week, analysts at CS First Boston, Morgan Stanley Dean Witter, Donaldson, Lufkin & Jenrette and S.G. Cowen have chopped their forecasts. They're concerned that the market's migration to cheap PCs -- and, therefore cheap chips -- will undermine Intel's profitability. And they're concerned that PC sales growth is slowing and that Y2K may cause weak PC and server sales in the second half of this year. Intel has at last introduced a cheaper PC chip called the Celeron, and it's selling just fine, thank you. But it also threatens to bring down Intel's profit margins. Maintaining those margins depends upon strong sales of the company's Pentium III and Xeon chips. Another worry is Intel's delay in manufacturing a faster version of its Pentium III chip, the Coppermine. Pentium III chips currently run at speeds of 550 MHz. By shrinking the wires that are etched into the silicon to a 0.18 micron width from their current 0.25 micron width, the chip should run at speeds in the 600 MHz range. But Intel isn't hitting those speeds yet. And some say the delay could affect earnings. Not everyone has soured on Intel. Through the din of earnings revisions and downgrades, U.S. Bancorp Piper Jaffray analyst Ashok Kumar emerged as bullish as ever on the company and its stock. With a Strong Buy rating on Intel shares, Kumar, who was previously director of marketing for the Pentium processor at Intel, offers a counterpoint to Fahnestock & Co. analyst Dan Scovel, who has a Hold rating on the stock. BUY! "We think Intel is the premier building block provider to the Internet. The stock trades at a 25% discount to 2000 earnings estimates. It's a very attractive valuation for a preeminent technology company" -- Ashok Kumar, U.S. Bancorp Piper Jaffray DON'T BUY! "Intel is a great company and it's very difficult to bet against them. But in many ways, we think they're a victim of their own success. When you're at the top of Mt. Everest, it's hard to go much higher." -- Dan Scovel, Fahnestock & Co. Lower average selling prices are a permanent fixture of the environment. But Intel's mix is changing. Now, Intel's sales are 80% desktop, 15% notebooks and 5% servers. We see desktops coming down to 70% of sales, which will help offset the effect of declining ASPs (average selling prices). Notebooks should make up 20% of sales and servers will make up 10%. Servers comprising a larger portion of its sales will moderate ASPs going forward. And with its network acquisitions, Intel is changing with the market and trying to reposition itself as a preeminent provider to the Internet. The issue in our mind isn't is Intel a good company. They can sustain a level of profitability. The issue becomes one of growth and where they go from here. Virtually all of the growth in the PC market is at the low-end, sub $1,000 machines, and PC makers are pressuring Intel to deliver cheap parts. The PC market can grow 15% in unit sales, but prices are declining at the same rate. So it ends up a wash. It's a stagnant revenue situation. Intel has made a big move in the last several months into the communications space, but the opportunity isn't big enough to give them substantial growth. Intel initially did not recognize the trend toward low-cost PCs, but once it did, it became the dominant player there, and we're seeing that now. Its Celeron chip isn't cannibalizing its Pentium III sales. It is having a slight effect on sales of its PII, which is essentially the same chip. The unit growth is at the low end of the market. Intel is moving into the workstation market, trying to subsidize its low-end Celeron chip with its high-end Pentium III. This is a tough balancing act. It's possible, but we're not comfortable with the bet that it's going to be profitable. Advanced Micro Devices (AMD) is also big enough to be a problem for Intel. Y2K will have no earnings impact whatsoever. Y2K is way overhyped. Yes, it's a serious problem that needs to be addressed, but there are a lot more serious problems out there. The second half is going to be seasonally strong, and there won't be a down tick in the server market. With Microsoft's Windows 2000 rolling out, Intel will be poised for a strong 2000. We have a $75 price target. There's a "halo effect" associated with Intel's valuation. But the company didn't grow earnings last year. And the Windows 2000 roll out is already built in. People are now starting to bring their earnings estimates down to mine. I don't have a target price, seeing as I have a Hold on Intel. But at about 15% to 20% below its current level we think the stock starts to look interesting.