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

To: Paul Engel who wrote (43943)	1/5/1998 4:52:00 PM
From: Cycleman	Read Replies (1) \| Respond to of 186894

A great preview of the future! Despite a price in the $70's per share, how can anyone disagree with the conclusion that Intel's future has never looked brighter? Fund managers' horizons extend only one or two quarters, and this is no doubt why they sometimes give the rest of us such excellent buying opportunities.

To: Paul Engel who wrote (43943)	1/5/1998 8:20:00 PM
From: Patient Engineer	Read Replies (10) \| Respond to of 186894

Paul, After riding AMD from $10 to $48 only to exit with disappointment in the low $30s and high $20s, I have to agree with most of what you say about Intel. They are unbeatable as a microprocessor vendor. AMD is left to feed off the scraps Intel drops from its table. My original premise with AMD was that Intel wouldn't chase them at the low end that would leave a big enough niche for them to live off. It turns out that Intel was willing to reduce its EPS in order to leave AMD no market. The result was that all of us consumers enjoyed a big cut in the cost of computing. AMD did us a big favor, but they gained nothing for it. Now a new dynamic has set in. One that I think even Intel does not control. The market has never seen an increase in the average selling price of a PC. Homes and businesses are reaching saturation. Soon the AVERAGE price of a PC will be below $1000. Volume increases are slowing. So how does Intel get EPS growing again? Until WallStreet sees growth, they will give Intel a PE that is no better than the general market. The driving force behind Intel is no longer technology. P2 killed Moore's law. P2 is barely faster than the same clock speed PMMX. What drove their success was brilliant marketing. But the marketing is getting harder as saturation is reached. With 45% of homes having PCs, now the marketing must convince people not just that a PC is good, but that they need a new PC because their old PC isn't good enough. This in spite of the fact that most people cannot detect the difference between a P2 at 300MHz and a PMMX at 200MHz. This is a tougher sell for Intel. If they can't make it, then they will have to settle for bumping along with flat earnings. Nevertheless, Intel has crushed the AMD threat for good. AMD is financially weak and technically discredited. By the time they recover, if they recover, Merced will be around the corner and AMD will be left to fight for table scraps again. Unfortunately the cost of the war was the permanent displacement of prices to a lower and less profitable tier. As an investment, Intel probably has a floor around $50-60. Not many companies can claim to have such a floor, but with their pricing power, Intel can simply refuse to let the stock go much lower than that. The question is whether there is a ceiling as well. Intel's stock price will go up if it earns more or if its PE is increased. In the short run, I don't see how Intel can earn more. Their price cuts are coming faster than the market size is increasing. If Intel increases in market share, then it will come at the extreme low end where profits barely exist or are negative. In aggregate, Intel's ASP is falling at a similar rate to which the unit volume is increasing. The result is profit drift. A higher PE comes mainly through higher prospects for growth. Intel's graphics venture, while strategically important, will not lead to meaningful revenue or profit growth. Even if Intel completely stole S3's revenues, it would be lost in the noise of Intel's other operations. There just isn't enough money there to drive growth for a company Intel's size. Intel seems bent on making a big push into the consumer market. Again we are talking about $20 ASPs and 30-40% gross margins. Even selling 20M units a year this market cannot lead to meaningful growth for Intel. Merced seems well positioned to replace the x86 over time and potentially drive up processor ASPs, but this is far out and it will take a long, long time. Still, Merced will be sold with huge profits. But I don't see any Merced-based PE boost for another year or so. So it seems like the best play with Intel right now is to trade it. Buy in the 60s and sell in the 70s or 80s. It may touch $100 again, but it seems unlikely in the next year or two. I suspect you disagree. I would love to hear your reasoning.