Dueling Fools
Intel In Sides
September 1, 1999
The Bull Rebuttal
By
It's apparent from reading Rick's assessment of Intel that we are approaching the question of whether this company is a great investment from two distinct perspectives -- the right one and the wrong one.
While Rick still views Intel as the past and present titan of the x86-based PC world, I prefer to think of this company as the coming giant of the networked, post-PC world. With the advent of the Internet and e-commerce, thinking of Intel as only a PC chip company is very much behind the times. Intel's attention is turning to the post-PC battles that are yet to come. This includes the server market, as well as other yet-to-be-discussed areas of the communications market. In regard to the latter, partnerships and acquisitions are playing a key role.
Intel is teaming up with Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> for asynchronous digital subscriber line (ADSL) modems and chipsets, and with Analog Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ADI)") else Response.Write("(NYSE: ADI)") end if %> in digital signal processing, an area that may have positive ramifications for Intel's future StrongARM products. The acquisition of Dialogic supports Intel's integrated voice/data networking presence, while the additions of Level One and Softcom extend the company's reach into networking chips. Moreover, in-house development of new networking products is not abating, as evidenced by the company's AnyPoint home network device.
The only salient issue Rick addressed was Intel's valuation. Intel investors should set aside traditional, accounting-based valuation lenses. So, out the door go P/E ratios to growth rates, price to sales, price to book value, and the like. Instead, let's focus on getting a grasp of what the company's real value drivers will be, particularly its cash flow growth, risk profile, and the length of its competitive advantage period (CAP).
The server business -- and attendant Web content hosting, storage, and delivery services using IA-64-equipped servers in Intel-owned data centers -- should make up the bulk of future cash flows. Even if Grove's forecast for expected server demand is only halfway accurate, Intel's revenues should get a mighty pop. Margins should remain robust, as server chips are high margin items to begin with. Intel already has its IA-64 factories in place, so capital needs shouldn't be unreasonable. Also, we can assume that Uncle Sam is not going to hammer the company with higher corporate taxes anytime soon. The end result is higher cash-on-cash returns for the business.
The company's risk and CAP go hand in hand, since they both hinge on the element of competition. The competitive risk from traditional PC chip rivals looks low. The real competition will come from IBM's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> server chips, Sun's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %> UltraSPARC, and Compaq's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> Alpha, which Intel manufactures. Here, competitive risk is harder to gauge. But if Intel's IA-64 architecture can become the server standard, and I believe it can, then the company's risk profile in the server chip market should become more favorable.
Standardization would also bode well for the future extension of Intel's competitive advantage period that, as demonstrated by the company's phenomenal stock returns over the past decade, is habitually understated by the market anyway. In time, the company will find its proper place within the competitive structure of the server chip business. But barring government antitrust interference, the company's efficient manufacturing processes and savvy management have set the stage for CAP enhancement in the future.
For the culinary-inclined, here's how things look: Start with a future trillion-dollar e-commerce market and a world consisting of billions of networked computers; toss in a focused business strategy and strong value drivers; stir everything up, let the mixture cook for a while, and out of the oven will pop a tasty stock appreciation treat for Intel shareholders.
This whole notion of thinking about the future and projecting what Intel might look like in the years to come might give non-forward-thinkers like Rick a stomachache. But that, dear Fools, is what I call a recipe for investing success.
Next: The Bear Responds