Investing guru Benjamin Graham said that "in the short run, the market is a voting machine, but in the long run, it is a weighing machine." As the world's largest microchip producer, Intel (Nasdaq: INTC ) has proved itself a heavyweight -- it just hasn't been tipping any scales lately.
The company reported less-than-stellar first-quarter results after the market closed Wednesday. With guidance lowered last month, the news didn't surprise the market. Revenues hit the midpoint of revised guidance and were down 5.2% to $8.9 billion. EPS was down 34.3% during Q1 of 2005 (which included an extra week), even with an aggressive buyback plan reducing the share count by 5%.
Intel's revenues for the year are now expected to be 3% lower, instead of the previously anticipated increase of 6% to 9% higher. The main cause appears to be tempered PC sales forecasts; sales are now expected to grow in the high single digits instead of 10% to 12%. This is good news for shareholders, who may have been expecting poor results from a loss of market share to Advanced Micro Devices (NYSE: AMD ) . Management has indicated that its position held in the first quarter, and it expects to gain share in the second half of the year. Strangely enough, AMD's management predicted a gain in market share for that company this year as well.
AMD will certainly be a threat going forward, but I'm more concerned by the apparent lack of widespread demand for more processing power in the near future. Avid gamers and businesses with data-intensive applications will continue to buy the best systems available. But at the moment, the common user doesn't need to. Demand for processing power from an increased interest in digital multimedia probably will not appear for a few years, because video, data storage, and wireless bandwidth are still the bigger bottlenecks.
With that in mind, for Intel, I expect a growth rate closer to 10% over the next five years, rather than the average analyst's estimate of 15%. Plugging the data into my friendly neighborhood discounted cash flow calculator gives me an intrinsic value of $23. Even though today's price is more than 30% off the 52-week high, I still don't find enough of a margin of safety to be interested.
Intel is a Motley Fool Inside Value recommendation. A free trial will give you access to Philip Durell's market-beating picks.