This was sent to me by email. I'm not sure who wrote it:
Intel
Why does Intel have a valuation of 42x earnings and recently as high as 60x earnings? Its because for years they consistently crushed the whisper numbers, not the earnings numbers, I repeat, the WHISPER numbers. Good job. It meant they had superior strategy, execution and market influence. It also meant that investors could confidently rely on their investment in Intel to grow at a double digit pace every single year. But being accorded a premium valuation is a double edged sword. If you simply beat or god forbid, meet estimates, the stock price or more accurately the growth rate of the price will suffer substantially. Look at how msft, dell and csco have been unable to beat their whisper numbers and correspondingly have languished over the past year. But because Intel had dominance in the cpu market and was wisely subsidizing a push into higher margin silicon markets like networking and communications, there was significant goodwill supporting the stock price. As a result, the share price has continued to grow at a healthy, still double digit pace over the past year. This in spite of Intel's recent inability to consistently beat the whisper numbers or even standard earnings estimates from a true operational standpoint. Remember last quarter when Intel only made earnings estimates when they included $2 Billion in profits from the sale of Micron stock? If any other company had done a similar smoke and mirrors act, the Street would have punished their stock price mercilessly. What happened? The analysts ignored it with a little knowing wink. That's what you call goodwill. As evidenced by today's earnings warning, Intel has no more options, and no more goodwill. Make no mistake, this is not a temporary aberration that Intel can once again sweep under the rug by twisting a couple of arms. This concrete event gives only a glimpse at the chronic, widespread structural problems that will plague Intel into the foreseeable future. I say again clearly, this earnings warning is just the beginning.
Intel's earnings miss is NOT a result of weak demand in Lower Moldavia or Western Timbuktu. What lack of demand? Barrett has repeatedly announced publicly, that they underestimated demand. Further, is it possible that AMD, Dell, Gateway, Compaq, HP, IBM, DRAM suppliers, Chipset suppliers, Motherboard makers, etc. are all either lying or simply forgetting to tell us something? Unlikely to the point of impossibility. More likely is that Intel doesnt want to admit their inability to execute competently at any level is the direct result of one factor: the tremendous competitive threat posed by AMD and the unexpectedly stunning success of the Athlon family of products. Simply put, AMD has better products at better prices in available quantity. The little Chihuahua at 1/50th their size is eating them for breakfast.
"So what!" you say, "Missing earnings one quarter doesn't mean anything!" On the contrary, for a company like Intel whose reputation and premium valuation depends on beating the whisper numbers or at minimum the earnings estimates, missing is the kiss of death. I repeat, for Intel, MISSING EARNINGS IS THE KISS OF DEATH!
"Well, maybe they'll take a temporary hit now," you say, "But they'll blow out earnings next quarter like they always do and the stock price will come roaring back." Wrong again! This miss is not some temporary glitch. This is the beginning of a painful new trend for Intel. Look at the US economy. Greenspan initiated 4 rate hikes between June 99 and Feb 2000 to slow the economy yet the market marched upward as if nothing had changed until the March/April retracement. It was not until June/August this year, a full 2 months after all 6 rate hikes had been implemented that it became universally acknowledged by economists and analysts that the economy was indeed slowing. Further, it is also agreed that the slowing we are seeing now is only a result of the first 2 rate hikes in June and August of 99. We have yet to see the impact of the final four hikes.
Intel is similar to the US economy in that it is a huge financial entity subject to the inertia of its own size. What we are seeing now is the delayed, effect of a year of incompetence and blunders:
- Sept 99: Recall of 820/Rambus chipset resulting in all major boxmakers revising earnings downward.
- Mar 00: "Paper launch" of 1Ghz cpu in nonexistent quantities
- Apr 00: Return to volume production of PREVIOUS generation Katmai PIII processors in order to meet demand.
- Aug 00: Widespread reports of Intel's inability to meet demand for highly profitable Xeon server cpus.
- Aug 00: Yet another delay(2 quarter) for much hyped 64 bit solution, Itanium.
- Aug 00: Actual shipment and eventual recall of defective 1.13Ghz PIII processors.
This list is not comprehensive yet it clearly shows that Intel's problems span the entire company from management to operations to technological development. Consistent, multiple failures across the breadth of an organization communicate that the problems are deep structural ones that cannot be fixed in the span of a quarter.
The decline in Intel's share price is far from over. Now that they have finally admitted to a concrete event widely accepted as a catastrophic failure for a company of their stature, they will begin to come under intense scrutiny. The thousands of institutional investors that have HUNDREDS OF BILLIONS at stake will begin to ask the tough, realistic questions they ask of any other company that misses earnings. This will create doubt where there was none before and that is big trouble for a company like Intel. Once the perception that Intel is no longer rock solid takes hold in the herd you will see a significant exodus of capital from the company. And why not? If Intel can no longer deliver significant bankable growth why not put your money somewhere that can.
AMD
AMD has executed flawlessly for the past 5 quarters at all levels: management, operational and technological. During those 5 quarters they have consistently beat earnings estimates and in most cases the whisper numbers. The Athlon family of cpus is now smoothly ramping volume production of its second generation Athlon processors called Thunderbird. 3Q estimates are on track for 3.6 million Athlons shipped, 4Q estimates are on track for 7.2 million Athlons shipped. At each speed grade the commonly accepted industry benchmarks widely acknowledge the Tbird offers superior performance while at a significantly lower price point. Further, while AMD sells every single processor it makes, it does not release products until they work and they can be shipped in substantial quantities.
AMD currently trades at approximately 10x forward earnings! 10X FORWARD EARNINGS! AMD is currently dealing with 3 issues.
The first is a history of operational missteps. AMD, due to extreme competitive pressure from Intel has had problems in the past with delivering its products from both a quality and quantity standpoint. It is clear from the state of the market that is no longer the case. As discussed above Athlons lead in quality, price and availability. AMD sells every single processor it makes, and the only thing preventing it from selling more is that it has 2 fabs. AMD sells 90% of the 1Ghz+ processors that are sold. It will begin shipping 1.2Ghz within 3 weeks and 1.4Ghz within a month after that. The Athlon platform is easily scalable to 2.0Ghz+ from both an production and technological standpoint. Its successor, the Mustang with more on die cache will take the platform seamlessly beyond 2.0Ghz. The industry consensus is that AMD has virtually erased its bad reputation for operational blunders.
The second issue is the P4. It is hailed by the Intel faithful as the chip that will kill the Athlon. I will list the major drawbacks of the P4.
- Intel is saddling the P4 with an unrealistic memory solution, Rambus. The market clearly prefers DDR DRAM.
- 100% die penalty. One P4 takes as much silicon as 2 PIIIs. But the P4 will be sold at the same approximate price and with the same approximate margins as 1 PIII.
- Volume production will not take place until sometime in first half 2000. Plenty of time for the Athlon to gain more market share and AMD more profits.
- It is not until volume production is begun that it will become clear what the wafer yield penalties will be and progress can be made along the learning curve inherent to the ramping of any product in volume.
- Until volume production begins, and the P4 can be significantly beta tested by the public, it is not clear that the technology will actually work.
- Early comparisons have shown no clear performance advantage of the P4 over the Athlon.
The third issue is one of visibility. AMD is approximately 1/55th the capitalization of Intel so it has an extremely small base of institutional investors and analysts who follow it. Consequently it is mistakenly lumped in with Intel in any analysis. "If Intel says demand is weak then that must mean that AMD will suffer as well." This results in unjustified dragdown affects on the price of AMD stock. This misconception will be remedied by the passing of time, and the consistent outperformance of AMD over Intel.
I will summarize:
Intel is currently trading at approx. 40X earnings and has issued the first of many earnings warnings. In the immediate future it has no chance of reversing this trend because the problems are deep structural ones that have been in place for awhile, the full effects of which we have yet to see.
AMD is trading at 10X forward earnings. It has crushed earnings estimates for the past 5 quarters and continues to execute smoothly at all levels: management, operations and technology. AMD is a bargain at this price.
Invitation
Contrary to what you might think, I do not revel in other investors losing money. I simply think it is a shame that so many Intel investors cling to the hope of long term return in ignorance when the real opportunity lies just across the street.
If you are a true investor and want to make money instead of clinging to past glory I again extend an invitation to you to come to the AMD board and learn more about the company. The posters are numerous and extremely knowledgeable and the discussions range from full blown earnings models to technical analysis. In fact if you seek out a gentleman by the name of Robert Bianchi on the board he has generously provided an Excel spreadsheet of his 3Q earnings estimate model to any and all that requested it. I guarantee that you will be genuinely surprised.
Have a nice day. |
