victor,
this is not exactly an up article.
NW
NEW YORK, March 10 /PRNewswire/ -- The following articles are now available exclusively on Business Week Online's Daily Briefing (http://www.businessweek.com/today.htm). Business Week is a division of The McGraw-Hill Companies:
Intel Dodges One Bullet, but It's Still in the Line of Fire
The good news: A deal with the FTC and AMD's woes. The bad news: A PC slowdown
Intel (INTC) has long been the 800-pound gorilla of the microprocessor business. The breadth and depth of the Santa Clara (Calif.) chipmaker is awe-inspiring, particularly to those who try to compete with it. Last year it produced more than $25 billion in revenue and nearly $10 billion in operating profits. It owns 75% of its corner of the semiconductor business -- and a $200 billion market capitalization.
And unlike fellow gorilla Microsoft Corp., Intel has just escaped the dark shadow of the federal government's wrath. In a last-second agreement revealed on Mar. 8, Intel avoided a trial of its own in a suit filed by the Federal Trade Commission, which claimed that the company has wielded its dominant market share in unfair ways to bring customers to heel. Although the agreement's terms aren't yet public, it seems clear that Intel won't have to confess that it's a monopoly. As a result, it has dodged all the threats that still face Microsoft in federal court, ranging from intense embarrassment to the possibility of a government-induced breakup.
The market didn't go overboard in celebrating the news. The $115 stock gained $5 when the deal was leaked. But the next day it fell by nearly the same amount, indicating that Intel investors hadn't been overly frightened of the FTC.
Here's what they are worried about: A slowdown in the personal computer industry. Rumors swirled on Mar. 9 that Intel would report an operating loss for the first quarter -- a development that, if true, would mean disasater for the stock. Already, the computer industry's entire supply chain has been hit by discouraging earnings news. It started with reseller Ingram Micro (IM) announcing an earnings shortfall in late December. Subsequently, computer makers such as Dell (DELL) and Compaq (CPQ) disappointed analysts with slower-than-expected sales growth. And PC retailer CompUSA (CPU) announced a decline in profits for the fourth quarter of last year.
RANSACKED BY Y2K? Intel's stock was hit by the slowdown bug in January, dropping 20% from its high of $143.68. That would make sense if PC sales have entered a long drought, which analysts say could reflect the impact of the Y2K bug. Many corporations are spending massively on fixing their Y2K problems before next New Year's Eve, and many analysts fear that technology budgets are being ransacked to pay for this work.
Not everyone agrees, however. "I don't think Y2K will affect PC sales any more than it has already," says Erika Klauer, an analyst with BT Alex Brown. "It costs a lot, but companies are still buying as many computers as they used to. If anything, they are increasing budgets, not cutting them."
Another cause for concern, of course, is the emergence of low-cost PCs. While Intel has cheap chips to compete with those of industry rivals Advanced Micro Devices (AMD) and National Semiconductor (NSM), it makes far lower profits on those chips than on its mainstay processors. For now. Intel has tried to remedy the situation with layoffs, factory closures, and fiscal abstinence. As a result, it has been able to hold on to its 30% operating profit margins -- stunningly high for what's supposed to be a commodity product in the age of the $500 PC.
POSITIVE MURMURS. At the high end of the product spectrum, Intel just launched a new flagship chip, the Pentium III, which within a year is expected to reach speeds of up to 800 megahertz (vs. its current top speed of 500 Mhz). Although no official sales figures have been released, the murmurs from Santa Clara headquarters are positive, and sales estimates for the P3, which costs about three times as much as Intel's cheapest microprocessor, are being revised upwards.
The best news for Intel might be the problems of its biggest competitor. AMD, which in January became the first chipmaker to sell more microprocessors in a single month than Intel ever did, has announced that it is still suffering from manufacturing glitches that it claimed to have fixed last year. As a result, it won't reach its production quotas and will most likely declare a loss for the first quarter -- an event that analysts are none too happy about. "AMD has always made great products. They can just never figure out how to make money making them," says one analyst who requests anonymity.
In the microprocessor world, AMD's loss is Intel's gain. "Every chip that AMD can't provide to PC makers will now be supplied by Intel," says BT Alex Brown's Klauer. "Those companies, like Dell and Compaq, that were really rooting for a strong secondary supplier are kicking themselves now." In addition, newer AMD customers such as Gateway (GTW), which last month agreed to buy AMD chips for the first time, won't get a steady supply and will have to turn to Intel instead.
At the same time Intel is battling to hold on to its margins as PC prices drop, it's also branching out into higher-margin chips. It now produces high-end graphics chips and chipsets and in early March announced that it had entered the networking business by buying Level One (LEVL) for $2 billion. "Intel has been evolving from being a microprocessor-only manufacturer to having a diversified product line over the last three or four years," says Klauer, who expects the stock to top $175 before yearend.
Now that the biggest black cloud hanging over the company -- the FTC lawsuit -- is about to dissipate, investors may find blue sky in Intel's long-term future. But be ready for some near-term roughness if those first-quarter operating-loss rumors turn out to be true.
Jaffe writes about the markets for Business Week Online |
