Street Fight: Intel
Edited by Jody Yen, Forbes.com, 06.18.01, 12:01 AM ET
NEW YORK - The economic slowdown and a capacity glut in the PC and
wireless industries have helped knock semiconductor giant Intel's shares
down 63% from last August's all-time high. First-quarter revenue of $6.7
billion was down 16% from the same period last year. Intel says it expects to
see an improvement in the second half of 2001, but will it materialize?
Joining us are Charles Glavin, director and
senior analyst from Credit Suisse First
Boston, who has a "hold" recommendation
on Intel (nasdaq: INTC - news - people), and
Nimal Vallipuram, from Dresdner Kleinwort
Wasserstein, who has a "buy"
recommendation.
Charles Glavin was a senior product
marketing engineer and a senior business
analyst at Intel from 1993 to 1996. He holds a
MBA from Northwestern University and a BA in economics from Bucknell
University, and is also a chartered financial analyst. Nimal Vallipuram has
been covering the semiconductor industry since 1996. He received a BA in
Technology in Electrical and Electronics Engineering from the Indian
Institute of Technology in Delhi, India, and a MBA from Northeastern
University.
Forbes: Charles Glavin, you rate Intel a "hold," what are your top two
reasons?
Glavin: My two main reasons are near-term fundamentals and valuation.
Right now, people are remembering the good old days of Intel, but overall
PC growth has been slowing and there will be increased pricing pressure.
The semiconductor market is shifting from a computer market into a
communications market. Computer manufacturers need to alleviate the
bandwidth bottlenecks in order to use the processing power that Intel has
provided. For the first 20 years, the driver in the semiconductor industry had
been how fast is your processing chip, but the industry is changing, and Intel
has not done a good job with reinventing themselves into a communications
play.
In terms of valuation, relative to the S&P 500, Intel is trading at
price-to-earnings levels we have not seen since 1987 (estimated 2001
price/earnings ratio for Intel is 50 versus 25 for S&P 500). The stock is
already assuming not only a robust second half of this year, but also a
robust 2002 and 2003. If you took Intel's guidance at face value for the
remainder of this year, and at 15% growth next year and the year after, Intel
is already trading at a 30 to 35 P/E to 2003 earnings. It will be really difficult
for them to make those earnings, especially since long-term growth rates in
the PC markets will be in the low teens.
Nimal Vallipuram, in light of Charles Glavin's comments, what's the
reason for your "buy" recommendation?
Vallipuram: My primary reason for maintaining a buy recommendation is
Intel's valuation. During a down cycle in the semiconductor industry, it is
fundamentally flawed to look at forward valuations. Instead, we ought to look
for the inflection point for the next up cycle.
The best way to look at valuations during a down cycle is to look at historical
valuations like price-to-sales and price-to-book value over the last 12
months. Intel, like the rest of the semiconductor industry, has gone through
a number of down cycles. If you go back and look at how they managed the
downturns, Intel is not overvalued. I expect the stock to turn around at $25.
While I agree with Mr. Glavin's comments about bandwidth bottlenecking
and processing power, this has been a problem for the last four years. We
didn't have enough bandwidth, but we still managed to sell enough PCs. If
the bandwidth bottleneck problem is sorted out, the PC demand will go up
significantly again. However, in the absence of a complete overhaul of
bandwidth bottleneck, the PC market will not go grinding to a halt. There will
always be PC sales, such as corporate replacements, where bandwidth is
not much of an issue. It is only an issue at the consumer level.
Charles Glavin gets the last word.
Glavin: I do agree that PC growth will continue, but not at the same rates that
people have been accustomed to. Sometimes investing is like driving a car
through a rearview mirror. In the case of Intel, people remember the heyday
of its growth and apply those memories to forward expectations.
While Mr. Vallipuram's valuation is one way to look at Intel, stock prices
incorporate future expectations. This includes growth and all
macroeconomic conditions. With the exception of the second half of 1999,
there has been a systemic change in the demographics of PC growth. Of PC
buyers, individuals in the high-growth demographic, such as emerging
markets, want a lower-cost PC. This is a shift away from the historic PC
buyer who supported the price of Intel's processing chips. While PC growth
will continue, it will also generate lower returns on invested capital than
Intel's historic returns over the last 15 years. |
