Last Friday, Intel (Nasdaq: INTC) declined 22%, and the Drip Portfolio saw its largest one-day loss -- nearly 9%. We've had other days where our loss was nearly that large, and those days proved to be mere blips on the radar -- as temporary as a firefly's flash. Those blips also proved to be buying opportunities. Is that the case with Intel today?
The extent of Intel's shortfall
Intel's stock declined when the company announced that third-quarter revenue will rise only 3% to 5% from second-quarter totals, to about $8.6 billion, rather than the 8% to 10% sequential growth that was expected. The missed revenue estimate means an approximate three-cent shortfall in third-quarter earnings per share. The quarter's sales will be about $500 million lower than expected, although they will still grow 16% year-over-year.
The reasons behind the shortfall
Soft sales in Europe related to the falling euro was to blame for the shortfall, Intel said. Skeptics doubt this and call it a cover-up, claiming that Intel's problems are company-specific. Either way, the numbers will no doubt become known during the quarterly conference call on October 17.
Given that other large companies have announced that the euro is hurting sales and, more importantly, that we believe in Intel's management, we are taking Intel at its word. We believe them when they say that this is not a company-specific problem, but a currency issue -- one that will eventually dissipate.
That said, some claim that Advanced Micro Devices (NYSE: AMD) is stealing market share in Europe to the tune of Intel's shortfall. Being smaller, AMD is taking market share, but not $500 million worth. AMD had second-quarter sales of $1.17 billion compared to $1.09 billion in the previous quarter, meaning a sequential gain of less than $100 million companywide. How much higher will the third quarter prove to be? (More than 60% of AMD's sales occur overseas.)
Even after its 22% decline, Intel's stock (at $48 per share) is up 17% since January 1, making it an outperformer on a Nasdaq market that is down year-to-date. The stock trades at 29 times our presumed revised earnings estimates for the year, and at 26 times the likely year 2001 estimate -- an estimate that calls for only 9% year-over-year growth.
Near-term upside in the stock should result if Intel proves that it should beat that 9% growth estimate in 2001. Can it? Its new Pentium 4 should launch on October 30 and is based on Intel's new chip architecture. The P4 will not be cheap (the average P4 personal computer will sell for at least $3,000), and the cost to make it won't be relatively cheap, either. The chip is twice the size of the P3. Intel will shrink it in 2001 and, thereby, improve yields per wafer.
Given the success of the P3, the Celeron, and already the anticipation for the P4 -- not to mention Intel's deep reach into the boxes of most PC makers -- it is difficult to imagine Intel's dominance in PCs and servers being displaced. In fact, AMD doesn't even have enough capacity to displace Intel. Meanwhile, Intel continues to earn nearly $2 billion a quarter in net income, and its main markets (PCs and servers) should continue to grow, not shrink.
So, what's all the extra fuss about?
The concern is that Intel is late to the cell phone and Web-enabled-device market, including the palm-held device market. Intel has divided itself anew to focus on these opportunities, but it was slow to move -- akin to Microsoft (Nasdaq: MSFT) and its late-arriving Internet strategy.
I'm somewhat concerned about this, but not as concerned as most. Web-enabled devices that will use chips are going to experience several product generations over the next two to five years -- with new versions likely rolling out, on average, every six months. This will result in many new opportunities for Intel (and others) to make chip sales, either mid-generation or in new-generation products before they're launched.
In other words, these markets are just opening and beginning to grow. Who and what will dominate (if any single company does) is still in question. Competitors beat Intel to the scene in most of these new markets, but Intel's long-term opportunity is still significant. Plus, don't forget its power to acquire other companies.
Drip Port's action
Although we recognize the many challenges ahead of Intel, especially in new markets, we believe that past success can lead to future success. Therefore, we'll invest more money in Intel now. Intel's stock has risen all year, but we didn't buy more shares during the stampede. We will buy more now that it's down. Next month's $100 will be sent to Intel this week.
Before you decide to invest in Intel, do yourself a favor and read the two detailed, knowledgeable posts below. The posts demonstrate how complex this company and its situation can be. One Fool argues convincingly for Intel and against AMD; the other Fool argues the exact opposite, also convincingly. The chip market is large enough for both companies, of course, but the leader is the only company that typically gets a premium valuation.
AMD vs. Intel (Pro Intel), Fool discussion board
Intel vs. AMD -- A Distillation (Pro AMD), Fool discussion board
Pentium 4 to debut next month, CNET News.com, 9/22/00
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