Irked on Intel (Drip Port) June 24, 1999

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Irked on Intel
Chip speeds matter and brand doesn't?

by Jeff Fischer (TMFJeff)

PARIS, FRANCE (June 24, 1999) -- News that Intel (Nasdaq: INTC) will delay its new Coppermine Pentium III chip sent shivers up some investors' backs last week. The 600 MHz chip is a high performance Pentium III that was due in September but has been delayed until November.

The delay means the chip won't make most, if not all, 1999 PC production schedules, so it may not appear in PCs until early 2000. The delay should also give Advanced Micro Devices (NYSE: AMD) the fastest chip on the market. AMD's new K7 processor -- named Athlon -- should begin to ship in some quantity in August at speeds of 500, 550, and 600 MHz, and in the fourth quarter Athlon should ship in large quantities. However, the ongoing fear is that AMD may not be able to produce high volumes of the chip until quite late in the year. Intel rose on this possibility yesterday.

Due to the delay on its Coppermine chip, Intel will produce a standard 600 MHz Pentium III this summer in order to have a 600 MHz chip on the market, but AMD's new chip should offer higher performance. The Athlon should give AMD a first -- the fastest chip on the market -- and management is calling it a watershed event. Could it last? The 600 MHz Coppermine Pentium III should outperform the Athlon when it arrives in November, but already AMD is putting its hopes on a 700 MHz chip by the fourth quarter.

So, why the delay at Intel?

Yield.

Intel is achieving high yields (perfect chips per wafer) making 500 MHz chips, but yields for 600 MHz chips on new 0.18 micron are not yet high enough -- although, they're probably already higher than AMD's yield on its new chip.

Ba-boom -- ching! Laughter, please. (No, stop. I'm serious.)

Why is yield important? Because the point of running a public business is to make money, and yield is how you make a profit in this industry. You need a high yield so you can sell enough chips at high enough margins to cover production costs. Why does AMD consistently lose money? Poor yield. Can we expect good yields from AMD on its latest chips? Time will tell. Until the company can prove that it will fill large quantity orders efficiently, PC makers will be cautious on large orders. It doesn't help that when AMD couldn't meet demand earlier this year, some PC makers left it and didn't return.

So why would AMD risk losing money again -- it just shared that Q2 is ugly red because of lost customers -- and rush a chip to market if it is indeed doing so?

The company is always in a race to catch Intel because Intel consistently has the fastest chip on the market first, at which point it slashes prices on all of its slower chips, putting AMD in a money-spewing bind. If AMD can jump ahead and offer the fastest chip first, it might be able to get its next generation chip out first, too, and thereby avoid the regular price crunch that Intel is always delivering to AMD like an express mail-bomb. Plus, AMD gets bragging rights. It can say, "We have the fastest chip on the market," no matter what kind of volume it can deliver.

Meanwhile, it isn't surprising that Intel would delay a chip until yields are as perfect as possible. CEO Craig Barrett is famous for demanding a perfect chip manufacturing process. In fact, he is said to have built his career via creating disciplined, streamlined consistency in Intel's chip factories. Whatever the reasons behind this delay, however, we'd rather see Intel make more money on its chips than rush them to market and sacrifice yield, especially given that there are alternatives. The 600 MHz Pentium III available this summer should be powerful enough to make most PC buyers pause and consider Intel even against AMD's new chip. We're talking fractions of a second in performance difference here, and which chip would you rather own? Intel or AMD?

Pull up a chair a minute.

Now, there are two things that irk me in relation to this whole situation -- two comments that I, and probably you, keep hearing from journalists and analysts. One comment is entirely contradictory, while the other shows a lack of understanding regarding brand loyalty and product quality.

First, Wise analysts and journalists have been arguing that people don't need the newest, latest chip, because current speeds are already more than enough. Hence, "Intel's very business model is in trouble," it was said months ago. "Intel keeps bringing out faster chips that nobody really needs or is rushing to buy."

But then, since this speed race just became interesting, the Wise flip-flopped and now they say that it is vitally important to offer the highest speed. In a way, it is important, I know. Most consumers want to buy the fastest chip. (Or do they? Then why are sub-$1000 PCs doing so well?) If you're going to argue that speed does matter, however, then don't spend the months prior to that arguing that Intel is in trouble because people are no longer interested in higher speeds or in buying the latest chip. It's obviously contradictory.

Second, I've read far too many times that brand doesn't matter anymore in the chip business -- that people no longer care what processor runs their PC. The most important factor to PC buyers now, supposedly, is how they get on the Internet. The Wise are arguing that an Internet Service Provider's brand is now more important than the brand of chip in a new PC. To this I say: Wake up!

Intel spends millions on advertising and the advertising is effective. When new PC buyers shop for a PC, they want Intel because they know Intel. They know Intel is the leader even if they've never owned a PC before. They want Intel in their PC.

Next, when experienced PC buyers shop for PCs, they typically -- in my experience -- want Intel, too. I don't want to disparage a specific company or brand, because I know that all companies work hard to survive and my two isolated experiences are not enough to make sweeping statements, but I will not buy any PC without an Intel chip. I've worked extensively on two PCs with chips other than Intel and the performance difference bordered on extreme. One PC froze nearly every time you used it for more than a few hours. The other PC consistently had to be rebooted for whatever reason. With Intel, I've only had good experiences.

Quality certainly does matter, amigos and amigas, and so does brand. Brand loyalty exists for Intel like espresso bars exist in Italy -- everywhere. In fact, yesterday the Rule Breaker listed the top 60 brands in the country and Intel was among the top ten. Where was AMD?

Brand stands for a great deal when it comes to the very chip that makes your computer work (or not work), and Intel has a great brand for a great reason.

End of rant.

Whatever the case, the delay at Intel is unfortunate however you slice it, and analysts are notching earning estimates lower and calling for a "long, dry summer." We sent our entire monthly investment to Intel last week and the Drip Port will likely invest in Intel yet again this summer. The business is mired in uncertainties, but it is imbibed with still more certainties. It is a certainty that PCs will continue to sell steadily, and it is a certainty that those PCs will need microprocessors. Intel is the only company in the world with the ability to produce enough chips to fill its share of the demand. Intel arguably has and will continue to have the best chips. Intel has royal sums of cash and is expanding into e-commerce and Web-related services and networking. (By the way, Intel was an early investor in eToys (Nasdaq: ETYS), so it made an untidy sum.)

We'd rather see Intel release the fastest chips first, but more than that, we want to see Intel continue to make good money. Only then can long-term value be created. The company may have another slow season coming, but it has been a master in creating long-term value even when under extreme change and duress (or especially under change!), and that is what we're seeking over the next two decades. We believe Intel can ride out minor setbacks and continue to succeed. We are investing in large part on efficient, smart management and market dominance, and in small part on business momentum.

For details on Coppermine and ramp dates for many of Intel's forthcoming chips, please visit this link. Also, the Fool's Warren Gump wrote about Intel in the Fool Evening News on Tuesday, and for discussion, please visit us on the Drip Companies board and hit the Intel board, too.

Bizarre Contradiction of the Day: Our guy is at it again. The same gentleman analyst who said that he would sell Intel a few months ago on cable TV also has an opinion on AMD. His opinion: Long-Term Attractive, which he reiterated today. The bizarre contradiction resides in the following sentence from him: "Though AMD's processor design is excellent, its execution, especially in manufacturing, has been sporadic. The next six months of execution with Athlon will either make or break AMD, in our view."

So... the company's very fate is in the balance. Its fate could be determined in the next six months, and our analyst from BancBoston Robertson Stephens admits that the company has been sporadic at best with execution, upon which its fate rests. Yet, today he reiterated his Long-Term Attractive rating. Repeat: the company is in a "make or break" situation over the next six months, he doesn't know how it may turn out and he almost sounds 50/50 on it, and yet he reiterated his long-term attractive rating on the stock.

Yeah. Put my retirement money on that one.

We might have more on Intel early next week. Fool on!

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