FOOL ON THE HILL
An Investment Opinion
Before diving into my notes, I want to mention a few broader observations. First, I'm impressed by Intel's solutions-focused growth philosophy. Across all of its divisions, Intel is utilizing its core competencies in manufacturing expertise and general computing intelligence to create solutions for its customers. Whether that means integrating new features into a product or venturing into new fields entirely, Intel is clearly seeking to create value by creating solutions. Smart.
Second, Intel eats its own cooking -- and learns a lot in the process. A lot of management's observations about the direction of the industry are founded upon what it sees happening inside Intel itself. For example, CFO Andy Bryant confessed that he didn't really believe in the significance of the Internet several years ago when then-CEO Andrew Grove was pounding the table on it. Then, Bryan was placed in charge of managing Intel's e-business. Soon, he saw that the Internet increased customer responsiveness, streamlined the supply chain, and offered better services and tools to employees. Bryant also took notice of Intel's need to double its server volume every year since 1997, as well as the need to replace and upgrade 38,000 PCs inside the organization in order to best take advantage of greater bandwidth and new e-business software. These insights from within give Intel insight into what's happening industry-wide.
Onto more of the nitty-gritty from the presentation...
Strong growth appears to be the story across all of Intel's divisions. In the client platform, PC growth shows few signs of slowing despite the oft-spoken claims that we've entered a "post-PC" era. Last year saw worldwide PC growth of 21%, and expectations are for 19% growth this year. Growth is being fueled by two global forces: adoption of the Internet and a faster PC replacement cycle by businesses.
Intel is seeing strong PC demand from corporations that are building out their e-business infrastructure. The mobile market is also a strong source of demand as road warriors embrace Intel's power-saving SpeedStep technology, which allows desktop-like performance when plugged into the wall, but offers the option of reduced performance and longer battery life while on the go. The continued demand for Intel's premium offerings has allowed Intel to maintain its profit margins through a steady mix between performance and value chips. Looking ahead, Intel's chips will continue to offer more speed and less power consumption, thereby enabling ever-smaller and lighter-weight mobile devices.
Intel's server platform also is benefiting from the corporate build-out of e-business infrastructure. The server market segment as a whole grew 32% in 1999, and management stated that Intel grew faster than that average. That faster growth is being fueled by gains in market share. Since mid-1998, Intel's market share in the high-end server space (>$10,000) has increased from 39% to 53%. Intel's superior price-per-performance is allowing it to steal share from the likes of Sun Microsystems. With the 64-bit Itanium server processor set for launch by the second half of this year, Intel looks well-prepared to maintain or even extend its lead in this space as corporations look for the best value in powering the processor-thirsty databases behind their websites.
In networking communications, Intel's revenues are growing more than 50% annually. The need for networking processors is growing immensely as packet-based services become more complex. Processors inside the equipment that runs the Internet are being called upon to do increasingly more work. First, it was just routing and switching, but now you also have the need for network monitoring, load balancing, firewall protection, and virus scanning, just to name a few. Hence, the strong demand for Intel's network processors. The need for intelligence inside the network should drive growth in this division for some time to come.
Wireless processing is another major growth opportunity for Intel. Inside every cell phone, there is around $30-40 of silicon. Depending on your source, estimates are for around 500,000 new cell phones to be sold in the next two to three years. Simple multiplication reveals that wireless silicon represents a multibillion-dollar opportunity for Intel. Already, Intel is the leading provider of flash memory, which is a key component in handheld devices. In addition, Intel has the chance to get inside wireless devices with its StrongARM processor, which offers high processing capability with low power consumption. One example of a recent StrongARM design win is the Compaq iPAQ Pocket PC. As the third generation (3G) of cellular technology becomes a reality by next year, newer handsets will require increased computing and memory capabilities, which should play to Intel's benefit. Part of Intel's strategy here will be to integrate the silicon innards of the cell phone to provide smaller and cheaper solutions to handset manufacturers.
Finally, Intel's Online Services division is gaining speed. This effort was designed to meet the need for highly reliable, convenient, and comprehensive back-office e-business services. Five data centers are already up and running, and another five should be in operation by the end of this year. Intel's goal is for businesses to be able to "plug into" one of Intel's data centers and have service as reliable as what you expect when plugging your phone into a jack at home. Intel will continue to expand its network of data centers with the aim of becoming the default solution for Web hosting and e-commerce. (The Drip Portfolio recently offered an inside look at one of these data centers.)
Intel's enthusiasm across all its businesses may warrant a bit of healthy skepticism, but consider that this company has a reputation for telling it how it is.