Tuesday, January 15, 2008

Is Intel a good investment?

I have been downsizing my AMD positions because, as I explained before, when a technology company is in dire straits, it is in a reactive position that makes it so much easier to manipulate the stock price. I don't like to be at the end of the line of important information.

Anyway, what I did with the money was to put it in other companies such as Intel. A mistake. I had a nice moderate bearish bias in my portfolio 'cos I was bearish on AMD, my main investment. I lost that bearish bias 'cos I haven't found good candidates to take bearish positions on, so, I turned bullish the market just before the market crashed, and Intel has done horribly wrong lately, so, I am really "hurt".

"Year to date", AMD is down 20%, Intc 15%, the Nasdaq 10% and the Dow Jones 5%, approximately. So, the talk of recession has really hurt Intel, but is Intel really vulnerable?

Intel has just gotten rid of a major competitor that put a clamp on profits, the worst (for Intel) of having Chimpzilla doing great products like the Athlon 64 X2 that force you to compete with gigantic cache memories in your Netburst lineup, is not that you lose market share itself, there isn't much difference between 85% or 70%, the real difference is that you lose monopoly status, and to prevent or recover lost market share you must lower prices. Since the attack was all across the board, the profit cuts where universal.

I wrote an article that now sounds very silly, but that illustrates this point. In March of 2006 I thought Intel wasn't going to succeed with the price war, and I wrote why. The prediction turned out the opposite because Intel managed to come back in great fashion and in great strides with the Core micro architecture line up, that is, outright superior products. The key are the superior products. Since Intel is at the brink of not having to concern itself with what AMD may do, it is close to once again be free to exploit the market at will, that translates to monopolistic profits.

In another area, Intel has been executing superbly. It succeeded at the challenge of bringing massive amounts of Core products and getting rid of the "Himalayan Mountain" of Netburst inventories, and the new families of products, with the advancements of transistors with metal gates and high dielectric constant field effect insulators so, from the execution point of view, shinning days lay ahead.

Having literally marginalized the competition to the scraps it leaves and being particularly strong in future prospects, product wise, the current Intel stock price is even lower in absolute terms to the price it had in early 2006, before the market fully realized that the K8 micro architecture was vastly superior to anything Intel was offering, thus, to understand the current valuation of Intel one must suppose that The Market thinks the business prospects for Intel are much worse today.

But are they? A significant component of Intel products are not consumers but business, the processors are a practical need that is not elective like, let's say, iPods. Its market is global. Part of its production is in the U.S. and part is outside. While Intel would surely be affected by an U.S. recession, or even a global recession induced by an U.S. recession, all of my analysis indicates that it should track way above the market, because it has more than average advantages and strengths to undergo a recessive period. Since Intel is much below the market in the beginning of this year, in my opinion a contradiction has showed up that I intend to exploit: Intel must not just catch up to the Nasdaq and Dow Jones, it must give better returns (or not as bad). Since there is already a 7%+ difference between Intel and the indexes, the closing of that gap represents more than 3.5% gain potential doing sort of an arbitrage "bearish the market and bullish Intel" in equal amounts.

I also think it is bullshit that the market for semiconductors will track worse than the broad market, yesterday's IBM results are sort of a confirmation. Unfortunately, the market keeps disagreeing with me...


Anonymous said...

IBM is now more a service company - I would encourage you to look at IBM's split between service revenue and semiconductor revenue before trying to do a comparison between IBM and Intel.

The key issue for Intel is overall CPU market growth - if the market doesn't grow, then Intel doesn't... while they may eat a bit into AMD's share it will likely only be if they decide to slug it out on pricing which in turn will hurt margin and stock price. (The market perception of the value of increased market share will likely be offset by the weaker margins which will likely be needed to get those gains)

So, in my opinion, a buy/sell on Intel is more or less a judgement on how you think the x86 CPU market in general will fare. Margins will improve with the migration to 45nm, but if the market is stagnant Intel will be in price cutting mode to eat into AMD market share for growth. If you expect the CPU market to grow, then Intel is significantly undervalued.

Just don't try to compare IBM's outlook with Intel's - IBM is now in a different market.

That said after a 50% earnings growth YoY, and a forecast that while under the previous giddy market expectations for Q1, is still relatively healthy, the Intel stock price hit is likely more severe than reality. Though in a bear market perception = reality.

Eddie said...

IBM is a service company and Intel a manufacturing one, alright, but it operates within the same market. If the market for Intel is bad, it will have to be for IBM too, that's my opinion. If you disagree, please reply with practical examples of market conditions that are good for IBM but not for Intel.

I think the x86 market can not track below the world economy, wherever the economy is good, the x86 prospers. The opposite is not so true, a recession in the world's economy hurts the x86 market but not at the beginning, x86 processors are an essential component of businesses.

I would say that the only real problem in the x86 market right now there is stagnation in the software market, most of significant new products are as bad as Vista, so, the market is undergoing deflation, but this has happened in the past.

I wrote the article minutes before the presentation of quarterly results. I don't feel there is anything to add other than the play of shorting the market and going long Intel is much better now: Year to date, Intel is 27% down, AMD 17%, the Nasdaq 11% and the Dow 7%; I can't see the reason why all of a sudden Intel is a much worse investment than the Nasdaq...

Scientia from AMDZone said...

Don't feel bad about a misprediction. My crystal ball was great from 2003 until early 2006. However, since Intel came out with C2D I have missed the mark many times. I'm kind of hoping that I'll get back on track in 2008. Intel's gross margins for 2008 are worse than I expected while AMD's are better. This is the way my judgement used to work through 2005, slightly underestimating AMD and slightly overestimating Intel. Lately it has been the opposite with AMD performing worse than I have expected and Intel doing a bit better. Apparently this makes me an outrageous AMD fan. Or at least according to crowd that frequents roborat's blog.

Frankly though I had been fairly familiar with Intel's behavior from Pentium through Prescott and AMD's behavior from K5 to K8. The Israeli team was a surprise, especially after the failure of the Indian team and Whitefield and the cancellation of Tejas. Also, AMD's purchase of ATI was a surprise as were the problems with K10. I'm trying to regain my perspective but apparently if I don't shout "AMD sux; Intel rulz" every ten minutes I'm "just in denial".

AMD seems so low now that I would expect it to be a good investment. In other words, unless AMD goes bankrupt I don't see how the stock could drop much from where it is. Intel, I'm not sure. With Intel's margins going nowhere through 2008 I'm wondering if their stock will rise much.

I'm thinking that Intel could get a big shot in the arm if AMD is late with 45nm and Intel has a big hit with Nehalem. That would seem to put Intel in a very good position in 2009 with AMD a full year away from a competing architecture.

Eddie said...

Scientia, you said this:

<< Frankly though I had been fairly familiar with Intel's behavior from Pentium through Prescott and AMD's behavior from K5 to K8. The Israeli team was a surprise, especially after the failure of the Indian team and Whitefield and the cancellation of Tejas. Also, AMD's purchase of ATI was a surprise as were the problems with K10. >>

My advice for you would be to read "Exploration of the Business Space": Intel always win in the end because it explores multiple options at the same time and strikes gold. AMD should have remained focused on doing the best it could with the resources it had, the single-die quadcore on underdeveloped process with a substantially different architecture, what I call the "Triple Challenge" is an adventure that is literally killing the company. I really took care to explain this argument in the article mentioned above. We both made a mistake in allowing us to be surprised by things that we should actually have been expecting. I know the article is long, but why don't you read it anyway and let me know if my recomendation was worth or not?