all: Interesting post on Motley Fool Community Board on Intel
Subject: 1998 Analysis
Date: Sun, Jan 4, 1998 00:00 EST
From: JArena3773
Message-id: <19980104050001.AAA08752@ladder01.news.aol.com>
As we go forward into 1998, following are some thoughts and analyses relative
to investing in the high tech arena.
1. Regarding the so called "Asian Contagion", I believe the market has already
discounted the worst case scenario, especially in the case of DRAM makers such
as MU and TXN. In addition, markets tend to get overdone on the downside as well
as the upside, and this is evident as the tide has now lowered all semiconductor
boats. While the SE Asian information technology market declined 30% in 1997, or roughly $2 billion, it should also be asserted that excluding Japan, Asia accounts
for only 15% of the global electronics business. Unless some new cataclysmic
event arises to further roil the Asian markets, 1998 should bring solid growth in
the Asian chip and PC markets. The Asian chip market is expected to grow 20%
in 98, with the US about 14%, and Europe 16%. The Asian PC market should
expand 30% to 13 million units. China will be the catalyst which will offset weakness
in countries such as Indonesia, Malaysia, and Korea. China now accounts for 27%
of total PC sales in Asia, and will become the number two PC market in the world
by 2001. Total information technology sales are projected to grow 40% in 1998.
Continue to look to the DRAM market as an indicator that we are at the bottom of the cycle, as $2.00 16 Mbit DRAM prices are below variable costs. This will cause many
of the second and third tier players will exit the business, bringing supply and
demand back into equilibrium short term, and intermediate term creating another
boom cycle. The move to higher margin 64 Mbit DRAM will also boost ASP's. The
biggest casualty could still be the Korean behemoths Samsung, Hyundai, and LG
Semicon. Although they are selling DRAM's in dollars and benefiting from reduced
costs due to currency devaluations, there is a double edged sword here. They are
also floating dollar denominated debt, which will become extremely onerous to repay
if the won has another precipitous decline. The most salient implication here is that the industry is moving to the .25 micron process, and 300 mm wafers. The inability of the major players in Asia to make the necessary capital expenditures to remain
competitive will cause a vicious cycle throughout the industry. The bottom line is that the semi equipment industry in light of all this is still projected to grow from $51
billion in 97 to $87 billion in 2000. However, this number could be overly aggressive
as delays due to financial constraints in terms of moving to 300mm wafers could occur. Volume production might not ramp up until late 1999 or early 2000. Notwithstanding, Deep-UV Lithography will be driven by both the .25 micron process and the .18 micron process. Deep-UV Lithography is crucial, as it greatly increases yields. What are the implications of all this for investors? It is probably OK to play a dead cat bounce in AMAT or ASMLF, but
long term investors may be a bit premature if taking a full position. It might be prudent to establish a half or a third of a position right now if you have a 3-5 year time horizon. (yes, I am still pounding the table
on TXN also)
2. In addition to the DEC settlement, the other key development for INTC over the past several months has been SUNW's commitment to Merced. Much to Scott McNealy's chagrin, he has been forced to support Merced in order to ensure his long term survival. Once again, INTC's superior advantage in terms of economies of scale has been leveraged. SUNW quite simply does not produce the volume of SPARC relative to INTC, thus they cannot be cost
competitive. Looking ahead to 1999, the overwhelming support that INTC has received for Merced is the biggest
positive for investors. The most significant negative is still the continuing paradigm shift to sub $1000 PC's. With the Internet and on-line commerce approaching mass market standards (25% of US households will be on-line in 1998), it is imperative that prices be driven lower if the NC/information appliance strategy is to be thwarted by the Wintel alliance. Although I have castigated Larry Ellison for being an egomaniac, conceptually he was
right on about the exorbitant costs of PC's. Ironically, however, it is the dramatic decline of PC prices which will be his undoing. (not to mention getting hurt by MSFT in database software) Ultimately, look for sub $500 PC's by the end of this year, which will not benefit INTC. Consider that to make $20 billion in revenue, they must sell 80 million Pentium II's at $250 each. The good news is that the sub $500 price point will enable household
penetration of close to 55% to be achieved by 1999, and close to 70% by 2000. Killer applications as I have previously discussed such as 3D, virtual reality, video conferencing, voice recognition, and artificial intelligence will still occur, albeit not as quickly as projected several years ago. The bottom line here is that upgrading to run these killer applications will also still occur. However, it will not occur at the old $2500 price points;
that paradigm has changed forever. INTC's restructuring in 1997 and their recognition that they must segment the market more effectively bodes well for them being able to exploit the new PC paradigm. There is simply too much volume in the low end for INTC to ignore. INTC has demonstrated an uncanny ability in the past to revise it's business model to changing market dynamics (witness their exit from the DRAM business in the 80's), and it would be
a mistake to bet against them long term. Look for INTC to introduce a new chip, separate and distinct from the Pentium line, to capitalize on the burgeoning low end business. While it is highly dubious that INTC earnings will surprise on the upside this quarter or next, it is still a long term core holding for many fund managers, and should get a bounce in January. Look for a trading range in the70-85 area until earnings growth around 10%
occurs in the third quarter. Short term, I would be writing covered calls against my long term position if the stock rallies to 85 in January.
3. Speaking of killer applications, it is also important to note the SGI and MSFT alliance, which will facilitate the growth of the 3D market. This alliance enables the Wintel alliance and SGI to set 3D standards, and enables MSFT to continue developing it's strategy of making DirectX the platform for 3D innovations going forward. More importantly, the alliance eradicates the existing conflicts over 3D standards, which should rapidly accelerate
growth. Within the next 12-18 months, 3D will become ubiquitous in the same manner that color replaced black and white.
4. Despite the DOJ, the MSFT juggernaut will keep rolling in 1998. Look for MSFT to win the battle with the DOJ, or worst case scenario an out of court settlement. The rationale for this statement is prosaic indeed; corporations/consumers want and need browser capability included in the O/S. The world has changed since the original decree in 1995, when most people never even knew the Internet existed.
Certainly, the introduction of Windows 98 could be delayed, but the impact of this on earnings will be minimal, although if this occurs a 20% correction in the stock price could easily happen. MSFT is betting heavily that Windows NT 5.0 will provide a major source of incremental revenue and profits. Already, NT has captured 50% of the mid range server market, and NT server revenues are projected to surpass all others including UNIX by 2000.
Moreover, on line commerce and Y2K problems,
will cause a spike in demand for servers in 1998. In addition, 98 will be the year that corporations will begin to transition NT to mission critical roles. It will become apparent to most this year that NT servers will replace some of the mainframe business, a fact which IBM is feverishly addressing. Also look for MSFT to use it's $10 billion war chest to ensure that it has a piece of every transaction that will eventually occur on the Internet.
Windows CE will remain a niche business, but one which should experience solid growth over the next few years. Market potential should be about 2.5 million units this year, which should triple by 2001. Look for the NC,NET PC concept to remain an even smaller segment, with the installed base growing to about 3 million units by 2001.
5. I would be remiss not to mention CSCO, which should become a $20 billion company by the year 2000. Ten more acquisitions in 1998, only 3% of the global population has access to the Internet, ASND and COMS faltering, end-to-end solutions strategy gaining momentum, US government committed to providing all schools access to the Internet by 2000 ($2 billion per year) etc. Take a look at the Jan 00 63.3 calls LYLAZ as a way to leverage the growth of
CSCO over the next two years.
Happy New Year To All
Joe Arena
rgds
ANANT |
