Article from SmartMoney: April 28, 2000 Intel Looks Beyond the PC
OVER THE YEARS, selling chips for PCs has served Intel (INTC) well. In fact, it's grown fat, swelling to a market value of $429 billion and becoming the world's largest semiconductor maker.
But now, the future of the semiconductor market is shifting to telecommunications and the Internet. And that's why the chip giant has started to change its tune. Nowhere was this shift more apparent than at its semiannual analysts' meeting, held yesterday in New York. "They spent a disproportionate amount of time on their nonmicroprocessor business, and you have to wonder why," says Dan Scovel, an analyst at Needham & Co.
Not that Intel's forgotten about PCs. In fact, the company said the PC market is still growing, and insisted that reports of the PC's death have been greatly exaggerated. Still, Intel focused its presentation on its plans to make chips for networking and wireless-communications products, and made clear to analysts and investors that it sees its future growth in those arenas.
Judging from the comments Wall Street issued after the meeting, Intel's presentation went over pretty well. While there was some talk from Credit Suisse First Boston analyst Charles Galvin that the company might exceed his 2000 and 2001 estimates of $3.10 and $3.70 respectively, no one officially changed their estimates or ratings. (Galvin's estimates are higher than the First Call/Thomson Financial consensus figures of $3.06 and $3.56, but not the highest on the Street.) Just about every firm had something positive to say about the meeting.
"It has been just over a year since Intel started beating the communications drum, and we walked away from the presentations [Thursday] impressed that Intel has refined the strategies considerably from a year ago," wrote Terry Ragsdale, a Wall Street Journal All-Star from J.P. Morgan.
The goal in Intel's new push is to become a major player making chips for a variety of networks; providing the chips that are used in switches and routers (the devices that direct data over the Internet); and pumping out semiconductors that will power handheld devices. The company is also focusing on providing e-business data centers that will house Web sites, applications and transactions for e-commerce.
While its networking, communications and wireless businesses grew by more than 50% to $2 billion last year, the three areas were still a mere fraction of Intel's overall $29 billion in revenue. But these areas should see the same kind of growth this year, said Intel's Chief Financial Officer Andy Bryant.
Intel Capital, the chipmaker's investment arm, will play a large role in this overall strategy. This division invests in companies that further Intel's stated goal of becoming the pre-eminent "building-block supplier" of the Internet ? manufacturing all the little bits of silicon that make the Internet go and that power e-commerce operations. Basically, this means investing in companies that are going to help Intel grow. A lot of companies. By the end of the first quarter, Intel's investment portfolio had grown to some 400 companies and $10 billion in value. What's more, Intel is increasingly investing in companies overseas. In 1998, less than 5% of Intel Capital was invested in companies outside the U.S. Last year, more than a third of the chipmaker's investments were across U.S. borders.
Intel's emerging business might have received most of the attention Thursday, but in the short term, its primary moneymaker is still making chips for PCs. At the very least, Intel had to give a nod to the continuing health of the market, and that's what Paul Otellini, general manager of the Intel Architecture Group, did. After the opening remarks, Otellini focused his discussion on headlines that appeared about a year ago touting the "post-PC era." Those headlines, which surmised the end of the PC, have yet to come true, he explained. Consider that last year, PC sales increased 21%. This year, Otellini said, Intel is looking for around 20% growth. For Intel, the personal computer market remains a very large sector indeed.
"I think we need to keep that in perspective," he said.
"Bottom line, we think Intel's in the sweet spot right now."
Dan Niles
Wall Street Journal All-Star
And that's what's keeping Dan Niles, a Wall Street Journal All-Star, interested in Intel. After the meeting, Niles said he remains bullish on the chipmaker. "They said this is not the end of the PC era, unless you call the end of the PC era a market that's 130 million units [strong], growing at 20% compounded," he said. "And that's basically the way I feel about it. This is really going to be the best year the PC industry has seen since 1996."
Strength in the PC market is coming from a couple of areas, according to Niles. First, he sees prices stabilizing as people buy more powerful systems to take advantage of all the bells and whistles on the Internet. Secondly, he expects corporations to install more servers to support e-commerce applications. Niles, who upgraded Intel shares back in January when the stock was at $82, thinks the stock could hit $150 by midyear and possibly $200 by year end. "Bottom line, we think Intel's in the sweet spot right now. We think there's huge upside in the numbers in the back half of the year for margins and revenue when their capacity comes back, and we're aggressive buyers of the stock from here," Niles said. "I think they did a great job at the analyst meeting."
But not everyone gave Intel's performance at the meeting a rave review. Danny Lam, a semiconductor analyst at market-research firm FHI Research.com, said he thinks the chipmaker is underestimating the pop in PC demand later this year ? and that left him "unsettled." Lam's forecast for PC growth is 25%, considerably higher than Intel's 20% outlook. It's a crucial issue, since Intel has been grappling with manufacturing constraints for the past several quarters. Lam also wanted to see the sort of detailed information on unit sales that Intel had provided at past analyst meetings. "The presentation was long on gee wiz and very short on specifics," he said.
Almost no one would say Intel's attempt to become the building-block provider to the Internet isn't the right move. But it's still early days for this aspect of the chipmaker's business, and analysts say it will probably be several years before meaningful results materialize. Even though there's abundant optimism that Intel will pull the transformation off, one thing's certain: Microprocessors are still what's driving the profits. |
