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Wednesday, December 15, 2010

INTELligent Investing...Note this post also appears in my column for Benzinga

Intel Corp. (NASDAQ : INTC) was known prior to the 2000 stock market debacle as one of the “four horsemen” the other three being Microsoft Corp (NASDAQ: MSFT), Cisco Systems Inc (NASDAQ : CSCO) and Dell Computer Inc (NASDAQ : DELL). While each of the aforementioned companies are still leaders in their markets at this point I like them all with the exception of Dell, however, this article focuses on Intel. Just yesterday the “banksters” at Goldman Sachs Inc (NYSE :GS) came out with a downgrade of Intel and that sent shares tumbling on the day, it amazes me that people still take these sell side analysts seriously after all we have been through in the markets. The rationale for Goldman’s argument was that 2011 PC sales are projected to run below last year’s and the essentially “tablet computers” are going to rule the day, especially Apple Inc’s (NASDAQ :APPL) IPAD.

To disclose up front I love the IPAD as I believe that it is slick piece of design and lots of fun to play with. Apple went as far as bringing the processor manufacturing under its own umbrella there by locking Intel out of IPAD and IPHONE sales, as this is an area where Apple currently dominates so why share any of the profits with an outside company. Part of the reason for Apple’s success on the PC side was because they acquiesced and opened up their laptops and PCs to the Intel processor there by allowing their user base to expand; even their latest MAC Book Air uses the Intel Core 2 Duo (so the more PCs Apple sells the better for the Intel investor). I have read many items on the internet where people have been saying that Apple has the best platform and therefore all others are irrelevant; I find problems with this type of narrow argument. All one would have to do is ask Sony Corp (NYSE: SNY) about its success with trying to keep all competitors out of the market by keeping draconian controls on technology and price, as they attempted to do with the Betamax, remember those machines. The Betamax lost market share to the VHS format even though its image quality was superior and its cassette was smaller because Sony was for lack of a better term was “greedy”.  Of course Sony learned from that mistake and when it came time to market Bluray they licensed out the technology and used the lessons of the past to beat back HD  DVD threat; this time the lesser technology did not win.

There are other hurdles that hamper Goldman’s vision of an Apple dominated world as they do not operate in a vacuum. Samsung Inc (Pink Sheets : SSNLF.PK) is pushing their Galaxy tablet and others are bound to come on to the market in short order many of which will use Intel chips. Moreover, Intel has not sat on its laurels pretending that the market is not changing. Intel has a tremendous balance sheet in addition to their manufacturing and design capabilities and as of late they had recognized their shortcomings and began making strategic acquisitions to speed their come from behind position. Intel as a corporation seems to acknowledge that mobile systems are a growing market segment and they have taken corrective action by tight collaboration with  Infineon Technologies (OTC: XETRA) and the purchases of Wind River Systems and McAfee each acquisition give Intel a missing piece of the puzzle. Critics of Intel argue that in the past acquisitions have been costly distractions and it is a risk but that was a different time and different management; I believe that at this point the dynamic is different as Intel is playing catch up and is not the dominator, besides past performance does not guarantee future results.

As an aside while the IPAD and IPHONE are sexy accoutrements to ones wardrobe it remains to be seen if true strong inroads can be made in to Intel’s bread and butter business of business computing at a rate faster than Intel can carve out market percentages in the mobile arena. I myself have run into many circumstances where individuals I know have either not been allowed or have had to give up Apple IPADs and IPHONEs due to corporate policy, integration concerns or security concerns. While us consumers and academia love the Apple products corporate America may not be as open to the notion of bringing these products onboard as Goldman would have you believe.

In my opinion Apple is making the same error as before with the MAC. The management of Apple is capitalizing on the fact that the market loves them at the moment, but their tight fisted control of the market and strong profits breed competition. The competition will come in the near future and Apple does not have a monopoly on great design; other companies or people can also develop innovative and sexy design and once they do it will eat in to Apple margins and their ability to charge significantly above market prices for their hardware. There are many legions of Apple devotees who would beg to differ, but like every business there are points in time when they are firing on all cylinders and can’t miss but eventually they do (the Newton comes to mind) and the sharks will smell blood in the water and Intel is not the shark but the lamprey in this instance. Apple needs to dominate and maintain their position. On the other hand, Intel has to make itself available and ride on the back of not just one shark but multiple, in essence they are not as concerned with who ultimately beats Apple as they look to be the “arms dealer” to all fighting at the battle.

The big knock on Intel at the moment is that there does not appear to be a standard in the “tablet arena” other than Apple’s vertical manufacturing chain. There is also competition in this bifurcated chip wilderness as ARM who is paired with Qualcomm Inc (NASDAQ : QCOM) appears to be in a good position , but their flaw is the same as the argument made against all others but Apple, a lack of a standard. The standard argument to me at least seems to play to one of Intel’s strengths and the fact that they can leverage not only the processing and software aspects of their chips better than let’s say ARM, but they can also capitalize on the fact that there are legions of Intel based PCs and software for their new chips to be able to interact with. As of this writing there are about 35 different tablet models from a variety of manufacturers that have chosen Intel chipsets for their units; a slew of new products coming out could develop in to a cash cow for Intel. Granted this sector of Intel’s business is still operating at a loss but the losses have narrowed year over year indicating that the segment is coming along and management is diligently working this area of the company.

Google Inc (NASDAQ :GOOG) is looking to expand its presence throughout our lives and is looking to develop a set top box for Google TV which of course you guessed has Intel as one of its partners. In the same vein Intel is busy incorporating its chips in to other devices to allow users to wirelessly stream from their PC to their TV via a technology known as “WiDi”. “WiDi” uses the customers’ existing wifi to stream any kind of content which is more flexible than Apple TV or Boxee, which would be its competitors. At the moment “WiDi” streams at 720p which will be more than adequate for the vast majority of users although Intel is planning to address the 1080P problem in the near future.

Intel’s acquisitions of Wind River and McAfee play in to the development end for integrating both compatibility and security for their chips, as well as, better software and hardware integration. Furthermore, Intel continually invests large sums in R & D to further develop and enhance all lines of their chips and this helps them keep them ahead of the competition on the Moore’s Law curve.  While I do think that Intel is a bit behind the 8 ball on the mobile space they have made the right moves to get themselves on track and have $20 Billion in cash to aid them in getting where they want to go.

The Goldman’s of the world have been projecting based upon PC sales numbers that Intel may come in on the lower end of their Q4 guidance and it appears that these pronouncements are being baked in to the price of the stock at present. I believe that the slowdown in Intel’s PC chip business is just a near term hiccup and that as businesses and individuals continue the move to Windows 7 that new high bandwidth applications are going to require both individuals and business to update an aging PC fleet and servers. The new move by Microsoft and corporate America toward “Cloud” computing could also spark more PC buying along with other devices that will run in Intel’s chips. I believe that the chip demand for 2011 is being underestimated. Moreover, Intel should be able to preserve or even bolster margins as they continue to grow their market share in the higher end segment where they have a substantial lead in development over competitors. Additionally, I believe that we will see more uses for the Atom chip platform announced like the announcement on December 14th that Infosys Technologies (NASDAQ : INFY) would be using Intel’s Atom chip in their smart home gateways.

As an investor you need to look at why you are buying Intel at the moment. If you are looking to make a quick killing then I suggest you look elsewhere, however, if you are interested in picking up a solid business that pays you 3% at current prices to wait for a recovery then Intel may fit the bill for you. Intel is always on the move and while they may not strike gold on every segment or venture they take on be assured that they are not lying waiting for Apple or anyone else to eat their lunch. To predict the decline of Intel based upon Goldman’s myopic view of their business is not to recognize what a dynamic juggernaut the company really has been and will be again as well as the vast number of companies outside of Intel that have and will design products around their industry standard chipsets.

Intel is currently sporting a trailing PE of 11.57 the lowest it has been since 1999 (INTC’s 5 year average is 15x) and their forward PE is projected at 9.99 for 2011; all of which stacks up favorably against the industry. Additionally, the PEG ratio (Price to earnings growth ratio) which is another way to value the company suggests that Intel is on the cheaper side as its PEG ratio is .85; a PEG ratio 1 or below indicates an undervaluation where as PEG of 2 or more is overvalued. Furthermore, Intel’s gross profit margins, operating profit margin and net profit margin all handily beat the industry averages in their sector. Even from a technical perspective at the time of this writing Intel appears to be under accumulation, maybe even by that same crowd at Goldman suggesting that Intel deserves a downgrade.

Even with the current correction in Intel ($21.36), the stock is in an uptrend and trading less than 5% above both its 50 day ($20.63) and 200 day ($20.57) moving average, which provide strong support; in fact the 50 day average is crossing up through the 200day which is known as a golden cross and portends rising stock prices. Using the Point and Figure method of charting projects Intel to rise to a price of $31.50 as it has moved in to a double top breakout. Of course none of this is a guarantee that Intel’s stock price will fly through the roof, but the current valuation and technical setup makes me feel comfortable deploying capital at these levels. I believe that Intel will probably chop around in the $21 – 21.50 range so I would not chase it much above that, conversely I would use a mental stop at about $19.47 in case Intel does not rise to the occasion, no pun intended.

Disclosure : Long Intel @ $19.75 & $20.75.

This post is also hosted at Benzinga.com where I write a column on Thursdays as well as random posts at other times.


rachat de credit said...

Il semble que vous soyez un expert dans ce domaine, vos remarques sont tres interessantes, merci.

- Daniel

Roger Vertes said...

Thanks for the compliment, but even experts are not really experts in this business but more like educated guessers. I am also glad that you found the post interesting. Best, Roger

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