Dueling Fools
Intel In Sides
September 1, 1999
Bear Argument
By
Intel will never be loved in perpetuity. The company suffers from a split personality, where investor sentiment flows in and out like the tide on amphetamines. One day it's just another commodity chipmaker. The next day it's a sought-after brand. The day after that, well, it's back to vanilla. Folks who have figured out this Sybil-on-a-microchip are sitting on the sidelines right now. The shares have doubled over the past year. Intel is a stock that is in demand today. Yet the lucky few who can smell the vanilla bean incense burning know all about Intel's mood swings. History repeats. Intel retreats.
That's it. I knew it wouldn't take long. You're already lighting up torches and drawing straws to see who handles the battering ram. I, Heretic. I'm bashing a tech bellwether and it seems as if I am advocating some very unFoolish market timing. I only have a few paragraphs to spare my hide. Actually, the way I see it, I only have a few paragraphs to spare yours.
If you're not going to accept the fallacy of buying cyclical stocks at their peak then let's get into why Intel is overvalued today with crumbling fundamentals tomorrow.
First, the valuation. Why is Intel worth $280 billion? That is more than ten times trailing sales, ten times the company's book value, and on an earnings basis it happens to be trading for twice its growth rate. I use the phrase "growth rate" loosely since earnings did fall last year. Even if you skip over 1998, you'll find anemic single-digit bottom line annualized growth over the last two years.
Second, the fundamentals. Right now, Intel commands 80% of the microprocessor market. Good show. Eighteen years of chip churning has made Intel a force. But what does the company do for an encore? You can't eat away at much more in terms of market share. Of course, you say, folks are going to buy more computers. That's true, though Dataquest projects that PC growth this year will be the slowest since 1994.
When you think about it, who will these new shoppers be? Will they be discerning novices looking to shell out a couple grand for high-end Pentium III-powered machines, or will they be cost-conscious first-timers lured by budget-priced computers with $400 subsidies from Internet service providers? Face it, on the low-end -- where the real growth will be -- few care whether it's Intel's Celeron or Advanced Micro Devices' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %> K6 processor inside.
It's a shame for Intel that the market is moving towards its lower-margin bargain chips. It's an even bigger shame for Intel's shareholders that AMD is now gunning for the high end. Intel's competitor has just rolled out the Athlon microprocessor. It's also known as the K7, but not as a K9. Nope. The Athlon is no doggie. It soundly beats Intel's fastest Pentium III chip. The Athlon is cheaper. The Athlon is faster. Last week Intel had to slash prices more than 40% to stay competitive -- and it still is more expensive and more lethargic than AMD's new chip.
Intel is a year away from an answer. Then again, judging by Intel's miscues on the earliest of Pentiums and then the earliest of Celerons, don't hold your breath waiting for a bug-free Athlon-killer from Intel. The pesticides will probably take to Compaq's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> now buggy yet potentially spectacular 64-bit Alpha chip by then. Intel hasn't had competition this worthy since the days of those smoking fast 386s. The fact that the company is going to be behind the eight ball until at least next year, when the high-end demand for Y2K upgrades will be history, does not bode well at all.
The casualties of pricing wars are obvious. The victors are the consumers. We might also come out ahead if Intel has to slash marketing costs to counter the lower profit margins. Maybe that way we'll never have to deal with another annoying "Shake your groove thing" dancing gizmo Intel ad campaign. Then again, I can help them save a few pennies that they will be sorely looking for in the future. Trash the Intel Inside slogan. Go with Intel Outhouse. Cover your nose and tread carefully.
My pessimism of course will shift once Sybil does an about-face again. Unloved. Stock on the floor. I'll gladly pen the bullish piece next year with Intel at half the current price. History repeats. Intel reheats.
Next: The Bull Responds