The End of Intel?

Welcome to the lonely hearts club. Last week, Dell (Nasdaq: DELL  ) decided to spice up its marriage to Intel (Nasdaq: INTC  ) by dating other chipmakers, beginning with Advanced Micro Devices (NYSE: AMD  ) . The way investors treated the news, you'd have thought Brad and Jen broke up again. It's as if they believe Intel's broken heart will lead to a broken stock.

Breaking up is easy to do
Calm down, people. Dell is still using plenty of Intel chips. And any cogent examination of history shows that Dell's decision was a long time in coming. During the summer of 2004, for example, fellow Fool Bill Mann was covering a potential deal that would have had Dell rolling out dual-processor servers based on AMD's Opteron chip. Now, that prediction looks brilliant, if a bit early. Dell will instead offer four-processor servers based on Opteron before the end of the year. Oh, and the company will also update its Intel-based servers for the ninth time.

Look, I know that sounds awful. It is, sort of. But it's not like Dell is running away with AMD. It's a flirtation, and a mild one at that. Multiprocessor, or MP, server chips of the variety AMD will be selling to Dell account for 13% to 17% of all processors sold in the Intel-compatible x86 server market, according to industry researcher In-Stat.

And it's not exactly out of bounds to say that Intel cheated first. Remember, pigs were flying over Cupertino because Intel CEO Paul Otellini professed his love of Apple (Nasdaq: AAPL  ) , which Mac-maker CEO Steve Jobs has since returned. Apple has dual-core Intel chips running in several Mac models as I write today. You don't really believe that Dell is happy about that, do you?

Snuggling in the server market
Of course, there's no point in simply downplaying the effects of AMD's incursion into the server market. As of Q1 2006, analysis firm Gartner (NYSE: IT  ) says that AMD had 48.1% of the U.S. market for x86 servers featuring four or more processors. Then there's this statement from Intel's most recent 10-Q:

Strong competition has also affected both our unit sales and the average selling price of our microprocessors and chipsets.Gross margin dollars in the first quarter declined more significantly than revenue due primarily to the effects of lower revenue from sales of high-margin logic products. As we look ahead to the second quarter, our customers are likely to begin to reduce their components inventory, and our sales would be negatively affected. Therefore, the first half of 2006 is a time to reset our business. [Emphasis mine.]

What, exactly, are "high-margin logic products?" Server chipsets, Fool -- especially those motherboards that feature four or more processors. That's probably why the next paragraph in the 10-Q says this:

We believe that our upcoming dual core microprocessors based on our 65-nanometer manufacturing technology will give us leading energy efficient performance across the desktop, notebook, and 2-way server market segments. [Emphasis mine.]

In other words, Opteron is a really, really good high-end server chip. We're going to need some time to dethrone it. (It's worth noting, however, that initial tests of the comparable Woodcrest processor are highly encouraging.)

The sum of Intel: More than zero
At this point, most investors hyperventilate at the thought of AMD ascending to the throne that Intel has occupied for decades. That's just silly, Fools. AMD still seriously lags Intel in chips for notebook and desktop computers. And Intel isn't sitting idle as its upstart rival presses the offensive. Widespread changes instituted by Otellini are only now beginning to take hold.

Witness Intel's culture. Engineers have long dominated the chipmaker's top ranks. That's unsurprising, of course. Silicon Valley is a programmer's paradise. Of the thousands of tech firms that reside there, only Apple has stood out as truly different. CEO Jobs is a marketer first. His emphasis has been and always will be usability and customer experience. Otellini, while lacking Jobs' legendary charisma, brings the same focus to the top job at Intel, and it couldn't come at a better time.

Again, I don't want to downplay AMD. Its role in forcing change at Intel has been enormous. But the primary driver, for my money, was Centrino. The mobile chipset with embedded Wi-Fi was arguably Intel's first "platform" to combine multiple technologies. And it has created more than $5 billion in value for the firm since its debut in 2003.

A focus on new platforms -- such as Viiv for digital media -- will have Intel working more deeply with dozens more firms than it used to. That may mean cooling long-term alliances with firms like Microsoft (Nasdaq: MSFT  ) . Though Viiv is initially intended for Windows PCs, Intel has been public in saying that it hopes for wider adoption of the technology. Wintel? What's that?

Still sexy after all these years?
My point is simple: As much as I believe that AMD will continue to develop more and better chips -- especially as the global market for technology increases the available pie -- I find it impossible to predict doom for Intel. Otellini's platform strategy makes sense, and it could add value in unexpected places. For example, the company's investment in wireless technologies such as WiMax -- think Wi-Fi on steroids -- could create numerous new devices in need of specialized platforms. Intel will be waiting if (when?) that occurs.

Most importantly, Intel's stock price reflects the slower-growth phase it has entered. The chipmaker trades for about 20 times this year's earnings. At $0.91 a share according to Capital IQ, that would be significantly lower than 2005's $1.40 per stub. Yet such declines aren't terribly unusual for a cyclical business.

It's probably also fair to point out that Intel last traded for 20 times earnings in 1996. Mix in a market-beating dividend yield of 2.2%, and it's not so hard to see why Philip Durell tapped Intel for his Motley Fool Inside Value portfolio.

The Foolish bottom line
Intel has definitely been spurned, and that's got to hurt. But I doubt we'll see CEO Otellini, fresh from an ice cream binge, pouring his heart out on Oprah. Instead, realize that Intel and Dell are no longer in an exclusive relationship; each is now dallying with other partners. That's probably going to be good for both firms over the long haul.

You may not buy that argument. You may believe that AMD is simply destroying Intel. You may be right. But I no longer see this as a zero-sum competition, thanks to Otellini's shifts. He's certainly got a tough task ahead, but his company is offering Foolish investors a market-crushing yield to sit through an attempted turnaround that, if successful, could generate billions in value. Such opportunities don't come often enough in my experience. You'll pardon me if I choose to take advantage.

Intel, Microsoft, and Dell are Motley Fool Inside Value selections. Ask us for an all-access pass to the service, and you'll be privy to chief advisor Philip Durell's best picks, which collectively are beating the market by more than 4%. You'll also receive instructive lessons on valuation and company analysis. Give Inside Value a try; it's free for 30 days.

Fool contributorTim Beyersdidn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Foolprofile. Dell does double duty as one of David and Tom Gardner'sMotley Fool Stock Advisorpicks. The Motley Fool has an ironcladdisclosure policy.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 503973, ~/Articles/ArticleHandler.aspx, 9/19/2014 12:15:38 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement