Before Al Franken was the politically charged radio host and author he is today, he was co-dependent recovering overeater and faux optimist Stuart Smalley, whose daily affirmations made Saturday Night Live viewers like me laugh out loud. His routine, which always concluded with "I'm good enough, I'm smart enough, and, doggone it, people like me," could easily be the poster child for denial. Or for cheesy talk shows that pretend to help people.
I've missed seeing Smalley on SNL, which is why Tuesday was a bit of a treat. That's when outgoing Intel (Nasdaq: INTC ) CEO Craig Barrett and heir apparent Paul Otellini stood in front of Wall Street analysts and alternatively played professor positive on stage. At one point, Barrett proclaimed that production and design problems from earlier in the year had been corrected and that Intel is now "firing on all eight cylinders in terms of new product introductions."
I have no reason to doubt Barrett. But here's the thing: Intel's problems stretch much further than the drawing board and assembly line. Yeah, I know, those hiccups were key to my thesis that the chipmaker could be a good short. That hasn't changed.
What's troubling is that the rationale Barrett delivered for a 2005 turnaround at Intel comes with its own set of flaws. Consider:
While Intel expects to see major growth through dual-core chips -- effectively two processors in one -- to be debuted in 2005, rival Advanced Micro Devices (NYSE: AMD ) is also working on such a design. Further, profits could be smaller than expected on these chips because Microsoft (Nasdaq: MSFT ) will charge only one license fee for customers that run its server software on dual-core chips. (It had been thought that Mr. Softy, Sun Microsystems (Nasdaq: SUNW ) , Hewlett-Packard (NYSE: HPQ ) , and others would change their pricing strategies from per chip to per core.)
Though Intel surprised the Street with a much higher-than-expected revenue target, inventory issues remain. Indeed, while a press release notes that the company could see an inventory reduction of several hundred million dollars, the company also said gross margin could still come in lower than the previously expected 56%. It's also worth noting that even if Intel hits 57%, the high end of its guidance, that's still seven points lower than last year's fourth quarter. Some of this may have to do with the company's inability to meet its previously disclosed plan for reducing the cost of manufacturing chips by 15%. (Otellini said Intel now expects to reduce chip-making costs by 20% by 2006.)
Intel gets the vast majority of its revenue from the personal computer business, and its new products won't change that much. Yet growth in the PC sector is slowing. Moreover, worldwide semiconductor demand is expected to slow some in 2005 and more in 2006.
Let's be clear: It's not that Intel's glass-half-full act is bad. I like the optimism. It's good for employees and, to some extent, customers. Intel should also be applauded for expanding its focus and trying to replicate its highly successful Centrino wireless package for other needs, including enabling digital homes. I have little doubt that the $4.7 billion investment in research and development the company is making this year will pay off someday.
But, again, that's someday. Back in the here and now, investors simply shouldn't fool themselves into believing that this $30 billion giant can banish all its woes in a couple of months. No amount of daily affirmations, no matter how spirited, can make that happen.
For related Foolishness:
What do you think? Is it finally AMD's time to shine? Has Intel really made the comeback management thinks it has? How quickly will Intel's R&D dollars pay off? All this and more at the Intel discussion board. Only at Fool.com.
Fool contributor Tim Beyers thinks he gets a bad rap for beating up Intel. Or maybe not. He is, after all, one of those creepy Mac users. Ewwww. Tim has no position in any of the companies mentioned in the story. To get a peek at his portfolio and Fool profile, click here.