Dueling Fools
Intel In Sides
September 1, 1999
Bull Argument
By
There has been so much literature lauding the achievements of chipmaker Intel over the past decade or so that it's hard for anyone to add anything valuable to the conversation. However, that won't stop this Fool from trying.
Since I'm acting as the bull for this duel, let's get this out of the way: I own this stock. To be perfectly forthcoming, this is the only stock I own. I love Intel's business. In fact, I probably love it too much -- more than any investor should without running the risk of replacing cold-steel objectivity with bubble-gum awe.
But to make my case for the company, I won't delve too much into the past, such as how Intel's stock has more than doubled the compounded annual return of the S&P 500 index during the most recent 5-year and 10-year periods. Nor will I spend much time reflecting on the present, including the company's rising margins, its impressive free cash flow, or its 80% unit share stranglehold over the microprocessor market. That's all great stuff, but the past and present are not what makes Intel a great investment today.
The future, dear Fools, is what Intel is all about. And believe it or not, this company is just getting started.
While the technology behind Intel's chips is mind-numbing in its complexity, the company's strategic plan for the future is quite simple: It wants to suck an enormous amount of value out of the Internet economy. That's not an entirely original idea for a technology company. What is original is that Intel is actually preparing itself to make this goal into a reality.
"In five years time there won't be any Internet companies. All companies will be on the Internet or they will be dead."
These words recently came out of the mouth of Andy Grove, Intel's co-founder, current chairman, and self-proclaimed chief product marketing engineer. Grove and CEO Craig Barrett are in the midst of repositioning Intel to deal with what Grove likes to call a "strategic inflection point." Only this strategic inflection point is different from the ones Grove has guided the company through in the past. It's the Internet. It does not just entail a change in the way Intel does business. Instead, the emergence of the Internet economy involves a massive shift toward a new way of conducting commerce entirely.
According to statistics Grove has been quick to cite, e-commerce currently accounts for a mere 1% of the country's gross domestic product (GDP). Within four years, that figure is forecasted to jump to 10%. In other words, e-commerce's percentage share of GDP will more than double every year for the next few years. Assuming zero GDP growth over that span (not likely, but we're assuming things here), that works out to a cool $1 trillion four years from now.
Yes, you read that right -- $1 trillion.
Within a few short years, the market into which Intel will be selling its products will expand from the current $25 billion microprocessor market to the $1 trillion market for e-commerce. Of course, Intel will not enjoy the same 90%-plus revenue share level it has come to enjoy in the microprocessor market. But it will enjoy a larger individual share of the e-commerce market than any other company.
How will this happen?
Intel's focus in the coming years will be on the servers that will support the build-out of the Internet and the expansion of e-commerce. Intel wants its server chips to be, in essence, the engines for e-commerce. Needless to say, Intel is already a major player in the market for server chips. (But remember, we're interested in tomorrow's server chips, not today's.) That means the future lies with the company's IA-64 architecture for tomorrow's servers. The first incarnation of that architecture is the Merced chip, which is coming to life in an Intel fabrication plant as I write this article.
Just as the x86 architecture propelled the growth in the PC industry over the past decade, the IA-64 architecture is poised to launch the server business. It better, considering these chips will have to support a $1 trillion e-commerce industry before the next Women's World Cup rolls around. With Grove estimating that some 95% of the servers needed by 2005 have not even been deployed yet, the market opportunity for the future IA-64 chips is enormous.
So, how much is a company with such a significant market opportunity staring it straight in the face actually worth? Intel's current enterprise value is just over $283 billion, which equals $83 per share times 3.45 billion shares, plus $666 million in long-term debt minus $3.6 billion in cash and equivalents on the most recent balance sheet. With these factors in mind, and the expected growth of the e-commerce market into the trillions of dollars, I don't think that price tag is out of whack for a company that stands to gain so much from a sector with such explosive growth prospects. I'll explain why this is the case after hearing what our bear Rick has to say.
Next: The Bear Argument