As Brian Lund wrote in Intel vs. AMD, "Margins have remained strong.... Gross margins hit 64% this quarter, well above 58.7% a year ago. Operating margins reached 32.7%, bettering last year's 28.1%. Net margins boosted to 28.7%, blowing out last year's 19.9%."
Most of these results beg the question: What is so horrible at Intel? The company entertains pricing wars and is seeing increased, viable competition, namely in Advanced Micro Devices (NYSE: AMD). However, Intel does not appear to be losing market share or to have declining operating efficiencies.
In fact, according to Mercury Research and as quoted in the October 30, 2000 issue of Red Herring, Intel was gaining market share as of the second quarter, while AMD was taking market share from other companies. From Red Herring:
Share of the PC Microprocessor Market(%)
2Q99 2Q00
Intel 82.0 83.2
AMD 12.0 16.0
Via-Cyrix 5.5 0.8
Other 0.5 NA
These numbers likely leave considerable room for error, and they are one quarter old. Even so, it is unlikely that Intel's position has weakened much, if at all, concerning overall market share. Most of Intel's earnings shortfall may be its own fault. It delayed its fastest Pentium III. The Pentium 4 has been delayed. It canceled other chips altogether. Clearly, Intel has internal issues to fix. It has faced such challenges in the past, too.Partly due to chip delays, the company expects fourth-quarter revenue to rise 4% to 8% from the third quarter's $8.7 billion. That will be the slowest fourth quarter (regarding sequential growth) at Intel in the last few years, meaning the company has plenty of challenges to overcome going into 2001.
But what should long-term investors watch most closely?
Intel is aiming to lead the most lucrative markets in the new network-centric economy (as compared to the PC-centric economy) -- meaning, large server and workstation markets. The coming Intel Itanium chip is hoped to "one-up" Intel's Pentium III Xeon processor, which already dominates the midsize server and workstation markets. In the long run, these markets are hoped to be the largest value drivers with the highest margins for Intel. The PC market will be a "flanking" business. Nice. But not the highest margins nor the biggest grower.
So, investors with too much focus on consumer PC chips aren't in tune with Intel's long-term strategies and focus. We need to focus our analysis on Intel's network markets, while keeping a watchful eye on the other markets. If Intel can be a leader in chips running the network economy, it should continue to grow nicely even if PC sales are tempered.
This year, we've only bought shares of Intel twice -- once at $42 and once (this month) at $40. So, despite the stock's 50% fall from its high, we haven't suffered much. We'll send our $100 November investment to Intel this weekend. Even though Intel may face less-than-stellar growth in 2001, the current share price is acceptable to us as long-term investors. I believe that the odds favor the company to eventually create meaningful long-term value from prices in the mid-$30s. Our check, as they say, is in the mail. Well, it will be soon.
For more and to discuss Intel, visit the related links box above.
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