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Its chips down, Intel set to rebound
The semiconductor maker has been losing share to rival AMD. But a fast new chip should restore Intel to prominence.
By Robert Walberg
When it comes to investor sentiment, Intel is no longer inside.
Intel (INTC, news, msgs) shares are down 20.4% this year, as pricing pressures, tough competition, declining market share and costly product missteps recently forced the chip giant to lower its first-quarter sales and earnings guidance.
With new products not expected to jump-start sales until late this year, the PC market showing signs of slowing down and seasonal factors working against it, Intels news cycle is likely to remain negative for at least the next few months.
Nevertheless, with Intel trading at multi-year lows, it would appear that much, if not all, of the bad news is already factored into the stock price. That assumption, combined with a few encouraging signs from last weeks Intel Developer Forum, suggests that now is a good time for patient, long-term investors to begin buying.
Closing the speed gap
After seeing its leadership role in the server market threatened by the superior performance of Advanced Micro Devices' (AMD, news, msgs) Opteron chips, Intel plans to launch its counterattack in the third quarter of this year with the introduction of Woodcrest.
According to Intel, Woodcrest will be considerably faster and more energy efficient than AMD's Opteron. Of course, AMD is unlikely to stand still, so Intels current claims might be overstated. But Intel will certainly close the performance gap, if not take the outright lead. That, along with Intels considerable marketing muscle, is a big first step back on the road to recovery.
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At the developer forum Intel also hyped the second-half launch of Conroe, its new desktop computer chip. Management claims that the new chip will bolster power by 40%, while using about 40% less power. The winning combination should help Intel build on its 4-1 sales lead in desktops over AMD.
The question is the whether Intel will get additional help from overall PC sales growth. Gartner Inc. predicts PC sales growth of 10.7% this year, down from 15.5% last year. While slower growth is obviously a concern for the chip makers, the upcoming launch of Microsofts (MSFT, news, msgs) new Vista operating system is expected to accelerate growth in 2007. (Microsoft is the publisher of MSN Money.)
Another potentially troubling development for Intel: Word is that Dell Computer (DELL, news, msgs) is threatening to jump to AMD chips unless Intel cuts its prices. Further price erosion could mitigate the bottom-line impact of any Conroe-related share gain.
Where Intel looks best positioned to reestablish its innovation leadership, however, is in the mobile market, where the company already enjoys about a 9-to-1 sales advantage over AMD. The company, which already scored a big win this year with its recently introduced Core Duo chipset when Apple Computer (AAPL, news, msgs) switched over from IBM chips, hopes to build on that success next year with the launch of its successor Merom. Intel will also be putting NAND chips into notebook computers next year that promise a considerably faster boot-up time.
A long-term bargain
Alone, none of these developments would be a trend changer, but taken together they signal a revitalized company poised to retake what it has ceded to AMD. Intel might not succeed on all fronts, but improvement on one or more should put the company in position to deliver a positive sales and earnings surprise down the road.
Just as important, the news cycle should turn from negative to positive and that will be good news for beleaguered shareholders.
Intel currently trades at about 18.4 times the current fiscal year's earnings of $1.08 and 15.2 times next years projected earnings of $1.30 -- lower multiples than other chipmakers and Intel's historical norms. Factor in relatively high margins, return on equity of 23%, about $2 a share in cash, free cash flow of nearly $8 billion, a dividend yield of 2% and Intels legacy status and the stock at todays price is a huge long-term bargain.
The stock could slide to as low as $18 in the short-term. But as long as Intels product launches remain on schedule, the stock should be trading back in the mid to upper-20s within the next 12 to 18 months. Ill continue to ride out the short-term downturn and keep Intel in my Street Patrol portfolio.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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