Intel spends more on research and design than any other company in the industry. This large investment is likely to continue yielding cutting-edge products that define the industry standards.
Moreover, the stock has dropped significantly and is currently off more than 40% from its December 2007 peak. Unless you believe in financial armageddon, troubling times such as these are the perfect time to pick up financially strong companies that are leaders in their sector. Given the financial problems competitor AMD is facing, Intel at this point is not just the leader in its sector but pretty much is the only game in town. Opportunities to pick up virtual monopolies at less than 12 times 2009 earnings, while collecting a 3.2% dividend yield rarely present themselves.
The company currently has nearly $12 billion in cash and short-term investments on its balance sheet as well as $5.29 billion in long-term investments when compared to just $2.83 billion in both short-term and long-term debt. Intel generated nearly $1.6 billion in net income just last quarter and while no one expects jaw dropping growth rates from Intel, expectations of nearly 15% growth are still respectable and may even be aggressive.
As companies like Intel kept packing more and more transistors into chips that kept getting smaller, electricity leakage and heat became a big problem. Intel lost market share to AMD in the server segment primarily because AMD's chips were running cooler and consuming less energy. Intel's answer to this was its new "high-k" material, which in Gordon Moore's own words is "the biggest change in transistor technology since the introduction of polysilicon-gate MOS transistors in the late 1960s." This new material has helped reduce "gate leakage" more than 100-fold and the chips based on this high-k material were picked by Time magazine as one of the best inventions of 2007.
The risks of earnings expectations getting revised downwards and this recession lasting longer than most people originally expected certainly exist but most of those risks already appear to be factored into the stock price. Consider the fact that even during the dot com bear market of 2000-2002 that took a severe toll on most technology stocks, the lowest Intel dropped to was $13.22 in October 2002. Intel had a much stronger competitor in AMD at that time than it does now.
Intel still has over 50% gross margins. So while volumes might contract, this is a business that would keep doing well into the future. Consumer spending needs to rebound and this thing would be back at previous levels. Govt. is now fixing credit markets, so if that goes well then lending should start again and we should be on track.
Since pricing is determined by supply and demand, when demand is growing at a faster rate than supply it should be good for pricing, margins and the stocks – subject to a lag between the time equipment is ordered and when it is installed. Last month, when the PPI data showed a poor pricing environment for semiconductors (see the chart of year/year price changes below) I said “I happen to believe the worst will soon be over for semiconductors.” The reason for my belief is that this year’s poor pricing environment stemmed from last year’s over-ordering of equipment, so this year’s thriftiness should start to improve pricing sometime soon.
Furthermore, since Intel and rival Advanced Micro Devices (AMD - Annual Report) were the first companies to over-order, the first to see the damage it did to their margins, and the first to announce cuts to planned expenditures, it should surprise nobody if they are the first to recover as well.
Finally, addressing the issue of whether the guidance is too aggressive, a look at the historical data suggests otherwise. Margins for both AMD and Intel are lower than they have been at any time since the depths of the technology bust. A modest improvement from current levels would still leave them well below the normal range, if there is such a thing.
I looked at inventory levels to see how supply and demand were trending at the company level. For Intel, at least, the inventory levels appear to be drifting back toward normal.
Stock performance following the report may come down to the December quarter guidance relative to expectations. There, too, however, the consensus appears beatable. Current estimates call for $10.4 billion in sales, which is just a 7.5% year/year rise. Given the acceleration in industry growth, that rate may well be in line with the overall industry rate despite the aforementioned justification for Intel to lead the group up.
With company inventory levels having peaked, margins potentially having troughed and overall industry health looking likely to improve, I believe Intel’s guidance is not aggressive, and may even be conservative.
Intel announced an effort to help chip customers set up their own clearinghouses to distribute programs for a variety of gadgets. This aligns their efforts to help broaden the use of an Intel chip called Atom that is best known for its use in low-end laptops called netbooks. During the keynote, Paul Otellini was quoted "I think we will break down barriers between industries." If this can break down barriers and free cost of movement, this innovation itself could suggest a good buy.
Intel (INTC) is trading below $13 a share. That’s right around where it bottomed in October 2002 after the tech bust. Prior to that, it hasn’t traded at these levels since 1996 - shortly after its IPO.
I never thought I’d see these prices for these stocks in my lifetime.
This is truly one of those rare opportunities to pick up the greatest companies in the world at bargain basement prices. If you’re willing to be patient and hold until the value of these companies is more rationally reflected in their stock prices, you will make money buying today.
Intel's D/A ratio is currently at 23%, as compared to AMD which stands at 74%. If anyone has the sector or DJIA average that would be a useful comparison.
In a time like this, the companies that will succeed are those with strong balance sheets. Just like homeowners with fewer assets failed, companies with weak balance sheets will fall behind, if not also go under completely (though I don't think that is the fate of AMD at this point).
Additinally, the WSJ today reports that Intel is spending $7bn to upgrade its manufacturing technology over 2 years. I like that approach - use downtime to better yourself.
However, the nadir in industry sales was in June, and the growth rate has been picking up steadily since then. Furthermore, the industry as a whole has been more disciplined about adding capacity. After more than a year of ordering more chip producing equipment than was needed to satisfy demand from customers, the last six months have seen orders for new equipment being placed at a far slower rate. In fact, sales of semiconductors in August grew 4.8%, while orders for new equipment saw a 19.4% decline year on year.
After Intel had become complacent a few years ago and allowed AMD to leapfrog past it with multicore CPU technology, Intel embarked on a massive R&D program using its worldwide resources. Not only did it develop technologies that now put it in a class of its own, it has also eclipsed the competition in the quality control, efficiency and economy of scale of its chip production (Intel has its own foundries). Intel also astutely decided to expand its reach well beyond the CPU market for PCs and now is a major force across a broad spectrum of technologies ranging from large corporate server networks to the small netbooks and will be going even smaller into the hot smart phone market this summer using the Atom chip working with LG and possibly others. Then there is WiDi wireless interfacing of laptops with large screen HDTV's and WiMax initiatives. The bottom line is Intel is now firing on all cylinders and the future is looking brighter than ever.
AMD has relinquished control of its fabs in order to gain cash and focus its resources on design to help compete with Intel. However, Intel still has control of its manufacturing whereas AMD does not anymore. This could mean AMD becomes more vulnerable in a price war with Intel because Intel will be able to control its variable manufacturing costs and AMD will not. AMD must also make sure the sold off fabs' process technology maintains the pace with Intel or Intel would gain advantage there as well.