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Technology Stocks : Semi-Equips - Buy when BLOOD is running in the streets! -- Ignore unavailable to you. Want to Upgrade?

To: Jacob Snyder who wrote (5515)	5/23/1998 8:02:00 PM
From: Proud_Infidel	Read Replies (1) \| Respond to of 10921

Jacob, First of all, let me say good post. But I must take exception with one thing. Giving AMAT a fair valuation of PSR= 2-3.5 is unfair and not realistic given market fundamentals. INTC and CSCO trade at steep premiums to their competitors. I won't use MSFT since that is a true monopoly and does not make for a good comparison in this case. However, one must look at why they trade a premiums to their competitors. INTC and CSCO both have a proven track record of making $$ even in the worst of times. COMS, AMD and the like have been having difficulty while the 2 giants are making $$(and good $$ mind you) even in a downturn. This alone warrants a premium. Size is another reason to give these 2 a richer valuation. When threatened with a new paradigm, these cos. have mgts which can react accordingly and turn on a dime. Cannot be said for their competitors which consistently lose market share. Strength begets strength and the colossus R&D budget of INTC alone is larger than the total revenues of some of its competitors. In AMAT's case, this sector is notorious for valuing companies based on a PSR measure, since during downturns their is no e to place under the p to come to some fair value. Like INTC and CSCO though, AMAT has proven itself through downturns and has a history of making $$ when others are hemmoraging it. It is my belief and expectation that the Street will place AMAT in a different corner than the rest of the sector. To date, this has been the case with AMAT having a substantial preium(using PSR only) to that of its competitors. To say AMAT should trade at a PSR of 1 because it has done so in the past is the one flaw I can see in your logic. Looking at PSR only and assigning a PSR of 1 would yield a value of ~$13. This is fine as part of your analysis but but you are ignoring earnings. AMAT at $13 would be trading at a p/e of about 9 using '98 earnings a p/e of about 7 using next years earnings. Earnings which by the way have been racheted down several times so will prove exccedingly low should any upturn come into the picture. Regards, Brian

To: Jacob Snyder who wrote (5515)	5/24/1998 12:21:00 AM
From: shane forbes	Read Replies (4) \| Respond to of 10921

Jacob, nice post! Just a few comments: (1) Re: INTC profits (and smoothed stock price trend) are a first order derivative of chip demand. AMAT profits (and smoothed stock price, and BTB) is a second order derivative, and as such is inherently more volatile. Derivative with respect to what? (time?) Demand is a necessary but not a sufficient condition here. INTC's profits depend on there being chip demand and INTC's ability to make a decent amount of money per chip. Having just demand won't be sufficient. The DRAM people are good examples. ASICs with low gate counts could be another example. Without profits you have to whittle down your past profits (your retained earnings) to build the next generation of chips. You can only play this game so long before the Grim Reaper will come a calling. With y(x) = x*x, y'(x) = 2x, y''(x) = 2 - that is the 2nd derivative can be LESS volatile than the first derivative. The fact is that these are different functions and so I am not sure what the meaning of the 2nd derivative being "inherently more volatile" means. If you mean AMAT's business depends not on a first order process - chip demand - but also on a 2nd order process - chip profits - then that's exaclty the way I see it as well. ---- (2) And, no, I don't believe the market for Intel's chips is becoming commoditized. I think Merced will be bigger than Pentium. If cheap non-Intel chips in sub-500 PCs is the wave of the future, then why is Dell (who uses exclusively expensive Intel chips and ignores the sub-1000 segment) the only boxmaker that is gaining market share and increasing profits? CPUs ain't diapers, and never will be. Hmmm... With many competitors now in the market INTC is forced to lower the prices of their chips faster than they had to in the past. Sub 1000 PCs, from nada about 15 months ago, are something like 25% of the PC market now. INTC leads in many places but if INTC is making a gross profit of say 40% on these low end chips and say 70% on the higher end chips (both just WAGs) then the market is justified in lowering INTC's long term valuation basis. And Yes I agree wholeheartedly Merced is going to be HUGE. INTC will be back in a big way then. However in the meantime they have some work to do wrt their business model etc. The future is the INTERNET - bandwidth not CPUs - voice etc will bring back the CPUs to some extent but the driver will be connectivity for the intermediate and long term. Unless they make a CPU that enables faster connectivity, I think the days when the microprocessor was the driving force of tech are over. INTC's chips may not be a commodity but CPUs are becoming commoditized - that means many people are building them, they are doing so very cheaply, the regular Jo customer is quite happy with a $75 CPU (because software has lagged these days - however when voice etc goes mainstream it should become interesting). Check INTCs gross margin trend recently and you'll see that their pricing is not holding up. The proof's in the pudding - the pudding is the numbers. (Having said all that it is a BIG MISTAKE competing with Mr. INTC - they will eat most people and spit them out for fun. INTC has vast resources that most other companies can't match. However this does not mean CPUs are not a commodity or becoming commoditized!) ---- (3) FWIW INTC has a lot of mom and pop support from investor clubs etc. Took over from KO I think as most popular stock (I could be wrong). That should help the stock. AMAT on the other hand could go down to 13. But I think more realistically the absolute worst case I see is something around 18-22 or so. 26 is a reasonable price these days. ---- (4) AMAT has one major advantage over INTC as far as the changing business models are concerned. AMAT has a fair amount of pricing power in their arsenal, INTC is seeing the whites of the competitor's eyeballs. AMAT is gaining market share. INTC is losing market share (albeit still very comfortably placed and using as a base a very high 85-90% monopoly). ----- (5) Personally if were locked in a room and told to choose one I would pick AMAT for the long term. (the one caveat being Merced - that will likely give INTC a sizeable boost - however even w/ Merced I prefer AMAT - yes I have a bias for the semi-equips!!!) If investing a lump sum at today's prices I would buy neither (with a definite no for AMAT and a slightly less definite no for INTC - I agree with you - INTC's downside seems smaller than AMAT's). If dollar cost averaging for a newbie investor I would do both (perhaps with a 60/40 ratio for AMAT/INTC)! Might see pain over the near term but should do very well over the next 5 years or so. ---- Shane. (Finally the W is the PERFECT analogy.)