Intel Overview

March 1st, 2005 - Copyright by Morris Rosenthal - - contact info

Trading Notes

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HPQ (Hewlett Packard)
INTC (Intel)
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NVDA (Nvidia)
ATYT (ATI Technologies)
WDC (Western Digital)
IOM (Iomega)

Notes on trading Intel stock for investing in my SEP

Intel has been the dominant force in PC processing since IBM selected their 8086 architecture processors for the PC AT back around 1985. In fact, backwards compatibility with the 8086 instruction set has remained so important that AMD has been eating Intel's lunch in the 64 bit CPU market, since their Athlon and Opteron CPUs work flawlessly with the old software, while Intel's Itanium processor has met limited success. I hope for the sake of Intel shareholder's that they've kicked Barrett upstairs to CEO will give Paul S. Otellini, currently president and COO, a chance to formulate a new vision. I'll never forget seeing Barrett announce early in his reign that Intel was a networking company - I yelled something like "You Idiot!" at the tube. Intel isn't just a CPU maker, they are THE CPU maker, unless the two year head start they've given AMD in the 64 bit market proves their undoing. Microprocessors accounted for fully 72% of Intel revenues in 2004. Maybe Intel is willing to rest on their laurels as long as Dell retains it "We'll use AMD CPU's when Dell freezes over" strategy.

Intel did just over $30 billion in sales in 2004, compared to just over $5 billion for AMD, yet Intel has almost 20 times AMD's market cap. Part of the reason is Intel's consistency, I don't remember the last time they had a losing quarter, maybe in the 70's? Intel currently pays a dividend a little over 1%, and has a "modest" P/E multiple of just over 20. The Intel vs AMD story, from a stock pickers perspective, is really an earnings story. Everybody knows what both companies do, nobody expects either one to go away, and most people assume that Intel's dominate manufacturing position will protect its market share even if stumbles on product introductions. Of course, people believed the same thing about GM and the Big Three. At one point during the bubble, the INTC stock price made it the largest market cap company in the world. INTC shares current valuation leave them at around 60% of Microsoft's valuation, so if you play the WInTel spread, INTC is looking undervalued (or MSFT over valued). In any case, Intel isn't really valued as a growth company anymore, just a business cycle dependant manufacturer. Institutional ownership of Intel is just over 50%, meaning it's still pretty popular with individual investors, and the insider lately has tended to the sell side. INTC share are backed by a cash pile of $2.70 per share ($16.8 billion total). Gross margins are over 57%, and their "Intel Communications Group" doesn't LOSE as much as it used to, just $791 million of $5 billion in sales. Just imagine where the margins would be if Intel hadn't tried to become a networking business. Half of those "communications" sales come from flash memory products, where they compete with AMD, amongst others.

The Intel Developer forum is going on as I write, and Barrett is scheduled to talk. Intel is promoting dual-core processors as the next big thing, and while I'm sure they'll manufacture and sell them, I don't see how it changes the Intel/AMD dynamic one bit. If anything, Intel's failure to keep ramping up clock speeds, an area where it traditionally leads AMD, is probably a bad indication, even if it's the fault of physics, rather than poor planning. Intel did spend $4.8 billion on R&D in 2004, approximately equal to AMD's total revenue, so if they aren't innovating, it's not for lack of a budget. Intel gives out a huge number of options grants for employees, recently authorizing 240 million shares (just under 4% of the outstanding shares) for options grants over the next two year. Intel undertakes the "goal" of not diluting shareholder equity through options grants by more than 2% a year, I find the whole thing a little scary - keep in mind the dividend yield is less than 2%. A mid-quarter business update is due from Intel on March 10th.

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