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Intel
Recap of the Intel Situation

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By 1poorguy
May 25, 2001

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Warning: This turned out longer than I expected when I decided to summarize how I see the current situation.

There has been much doom-saying here as of late. And with the performance of INTC over the past 18 months, it is perhaps appropriate. I, for one, appreciate the thoughtful bear because he/she brings up points I may not have considered. So what do we believe the current INTC situation to be?

INTC has lost some share to AMD. That is a fact. Can AMD continue to hold that share? Dunno. Accusations of paper launchesb and unplanned delays make one wonder if AMD is falling back into their old pattern. FWIW, it looks like INTC may be falling back into their old pattern of meeting launch deadlines with products that work (!!).

1. P4 throttling. I think the jury may still be out on this one. I've read articles where performance hits were alleged (though not proven from what I could see) to have resulted from throttling due to heat. If true, that still begs the question whether a) the temp sensor was faulty, b) the chip really does run too hot, or c) something funky external to the chip was occurring.

One thing I am sure of, if it is a real problem, INTC is cracking the whip to get it fixed (I've known people past and present who work or worked at Intel, and they all agree they are worked pretty hard). I don't believe INTC will allow a problem like that to survive for very long. Of course, if the throttling is a real problem that is still a bad thing for Intel.

2. Diversification. They have closed several business avenues they were pursuing. A fact. How much did this cost them? Probably enough to spoil my appetite for dinner tonight. But other avenues are showing great promise. PB's recent snippet on the networking component that was substantially smaller and cheaper than JDSU's offering is a positive sign. Some of their other ventures are even making a profit (perhaps we can persuade PB to give a detailed list sometime!! :-) ). The new wireless chip they announced looks very exciting also!

They correctly realize that CPUs are still their mainstay, but that saturation is coming soon. Saturation leads to stagnation. Not good. So they are opening new ventures. I see this as a positive move. Another company I own, Nokia, did the same thing...not all that long ago they didn't even make anything electronic (rubber boots and such, as I recall), and now they are the cell phone king. I don't think CPUs will ever become a commodity to the extent of rubber boots, but Intel does seem to realize that the landscape is changing.

3. GHz vs. MIPS vs. whatever. There are two types of consumers out there: the clueless, and the clueful. The clueless will look at the GHz rating and be done without actually knowing how fast the machine is (but patting themselves on the back nonetheless for being so clever). The clueful realize that clock speed is only part of the story. Currently AMD has the clock crown. But all glory is fleeting. INTC will take it back (and then AMD may yet take it back again, and so forth). But whose chip is more powerful? Athlon appears to be a good product, but I have heard anecdotal evidence that it does have a reliability problem. Hardly conclusive, obviously, but a concern for AMD. Intel has a pretty solid reliability reputation, and it was earned. They aren't perfect, but who is? While probably not truly correct, in my mind performance currently is a tie. Once software is optimized for the P4, which is already beginning, I suspect it will start blowing doors off of Athlon. Time will tell.

Interesting thought...could it be that the price cut helped make the P4/Rambus combo more appealing? It is supposedly much faster than anything else, and the report by another poster indicates that mobo manufacturers are seeing an increase in popularity for this combo.

4. Support. Dell is still with INTC. Exclusively. Good for Intel, bad for AMD. "Intel Inside" still works. Good for Intel, bad for AMD. Of course, PC sales are still slowing as of now. Bad for all of the above. Microsoft is getting ready to release a 64 bit Windows. If it is true 64 bit (and not a shell on top of an 8 or 16 bit DOS, or some other such stupidity), then the Wintel platform will continue to rule, IMHO. I'm not a great fan of Windows, but their latest versions do seem to have fewer problems (and more features) than their earlier ones. Unless someone writes a Windows OS for AMD architecture, then AMD is going to have to "copy" what Intel has done to some extent to remain compatible or continue to suffer from eccentricities (note: I've never personally encountered these eccentricities, and my mom did have an AMD chip for a while when I was in college, but there has been anecdotal evidence floating around for years and I know a serious PC guy who did have issues).

In any event, Wintel is still a significant advantage for Intel.

5. Valuation. This could get dicey. If earnings and cash flow were now what they were a year or two ago, Intel would probably be fairly or under valued. Currently it looks like they may be over valued. The DCF that I ran (through Valuepro) shows an intrinsic value of 26.21 if I use a discount rate of 10% and a growth rate of 9%. That's really close to where the stock price is now.

So where does this leave us? I think Intel is still a good company, overall, but at current prices it may not be a good stock. Of course, a few homeruns in their new ventures (and a general semi sector turnaround) could change this quickly and radically. Unfortunately, my crystal ball is in the shop...

1poorguy (long INTC and NOK, no interest in AMD or DELL or Rambus)