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July 30, 1998

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Subject: Re: Why the optimism?
Author: PietrzakFool

I have heard lots of talk on this board that it will be another 6-18 months of relatively flat earnings/prices and then things will pick up and the stock price will soar. Now don't get me wrong, I am long on Intel (I'm in the DRiP program), but I was wondering what the justification for this thinking is? Why is everyone so optimistic?

I personally know practically nothing about stocks (I only recently became aware of the MF site and started learning about them), but I've been in the computing world for some time, and so perhaps have a different slant on things than you do. For example, you state:

The television I bought in the 80's still does its job fairly well (though this may change with the coming of HDTV, but that is still years away). The computer (a Commodore 64) I bought in the 80's is a relic (I am actually planning to build a museum-like display case for it). In fact, the computer I had just 18 months ago (a 486) is obsolete, and the computer I bought 18 months ago to replace it (a 200 MHz Pentium MMX) is quickly going the same way.

This is the way the computing world has been since the idea of a "mechanical computer" first took shape. So far, ingenious engineers have always found ways to perform the same old operations differently that take less time or less power or are more reliable. So long as this keeps happening, machines will keep being made that can do things not feasable with earlier systems. Thus, obsolescence. You point out:

I read an article (I think in PC Magazine) that said people think nothing of buying a new car every 2-3 years, but don't think the same way about their computer. Can the PC industry foster this kind of thinking among the public?

Ridiculous! I suppose 2-3 year old computers are still usable (and I personally don't buy cars every 2-3 years myself), but at some point it becomes painful to continue using a given system. Example: I have my Dad's old Apple ][ up in my attic with a copy of Visicalc, a sufficiently useful spreadsheet application. It only cost him around $2000 for the system (back in 1980), if I recall correctly. Would you buy it now (even at a discount)? Probably not: todays computers can do the same job, but better, quicker, and less expensively.

Why does anyone use a computer in the first place? You want to type up a letter, or compare some stock prices, or play a game, or mess around on the internet. The fact is, with more RAM, HD space, screen size, and, yes, processor speed, these jobs are indeed all done better. If a given family was able to afford their first computer after X years of saving up for it, I would presume after another X years, if it is a tool they use often, and particularly (as has always happened in the past) something new & interesting won't even work on their older machine, I suspect they will choose to upgrade. (Anecdotally, this is what has happened with most of my friends who have owned 1980s and early 1990s hardware. It just made sense to do so.)

Anyway, so much for my view of the demand-side. On the supply-side:

And with Intel having to spend more and more money on R&D just to stay ahead, that also will eat into profits. They're now down to .18 micron, and I read that they will reach a limit, a barrier that they can't physically go beyond, at around .13 micron. What will they do after that? Some technological advancement may allow them to go a little lower, but not much. Eventually they are going to have to switch to some new way of making processors (perhaps quantum computers). And this is going to take a lot of effort and $$$.

Yes! An interesting dilemma, eh? We're all racing headlong towards the Ultimate Computer (tm), the processor which cannot be made smaller, faster, or cheaper. There are two possibilities, as you imply. One, there really is a limit. Someone will get there first, establish a massive market share for the product (and who wouldn't want the Ultimate Computer (tm) sitting on their desk?), and the party will be over. New computers will then differ mainly on the styling of their case or their new Keyboard Airbag Anti-Carpal-Tunnel safety devices. As to Intel's role here, one guess as to who I think would reach this point first (at least w.r.t. garnering a massive market share).

Two, perhaps there is a way around the atomic-level boundary. Going Quantum would bring about a whole new world of computing, from what I've heard. So, who (in todays evironment, at least) would you think has the knowhow, drive, and $$$ to bring something like that successfully to market? (Again, one guess only, please.) (Alright, yeah, maybe somebody like IBM as well, but Intel's probably up there.)

Yes, nothing is for certain. In the really long term, who knows what will happen. But demand for faster, cheaper processors is unlikely to ever go away IMO, and right now, today, Intel is the major player in that game. Regardless of which way the industry turns, so far as they keep on their toes I think Intel should be able to stay in the game. Which is why I'm optimistic for its future.

John


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