Inside the Intel Controversy
By Ari Weinberg
Aug 08 2001 04:20 PM PDT
Between a report of a probable price war and the quagmired PC market, analysts are resoundingly split on the chipmaker's stock.
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Intel Corporation
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Price wars are about the worst thing a company can engage in. As prices drop, revenue gets hit. Margins fall, crimping earnings.
That's why a report Monday by Lehman Brothers' semiconductor analyst Dan Niles on Intel moved the market so dramatically. In blunt language - "for those of who you thought the price war was already aggressive, you haven't seen anything yet" - Niles outlined a potential schedule of price cuts on the company's Pentium chips. The cuts are designed to stave off rival Advanced Micro Devices, which is gaining market share.
Intel fell $1.40, or 4.4 percent, to $30.28 on the report. That same day, Salomon Smith Barney analyst Jonathan Joseph also stated that Intel chip prices would continue to be under pressure. And Joseph cut his third-quarter earnings estimate to 8 cents a share, below Intel's guidance.
At this point in the game, investors should be well aware that Intel will likely take the potentially pernicious approach of cutting prices to rejuvenate its sales. After all, the company intoned as far back as April that it would price its chips competitively to combat AMD. Many analysts have a neutral rating on Intel. Arguments to get in at current prices - Intel trades at about two-thirds of its 52-week high, at $29.61 - are based on the fact that Intel is, well, Intel.
When the chips are down, Intel isn't afraid to sacrifice margins and earnings to protect its market share. Advanced Micro Devices has closed in on Intel's share of the PC microprocessor market. Sure, those last few chips make all the difference on the bottom line because the marginal return is so high. But Intel has signaled that it is ready to play hardball to protect the nearly 80 percent of the market it controls. It is especially jealous of its status where AMD, which improved to a 22 percent market share from a 13 percent share in just two years, is concerned.
Of course, competition isn't Intel's only concern. The sluggish PC market, the biggest buyer of Intel's product, is also part of the equation. While Intel CEO Craig Barrett said last week that he expects the PC industry to return to seasonal growth patterns in coming quarters, there's no evidence of that happening yet. The Semiconductor Industry Association reported June chip sales at $11.6 billion, down 31 percent year-over-year, as PC buyers stayed out of stores. In October 2000, sales topped out at nearly $19 billion.
"The key here is a PC market recovery in the near term," said Goldman Sachs analyst Terry Ragsdale. With a "market outperform" rating on the stock, Ragsdale says a number of factors, outside of competitive pricing, could favor Intel.
Ragsdale says the upcoming release of Microsoft's Windows XP operating system, in addition to the PC inventory correction, will benefit Intel. While he admits that back-to-school computer buying hasn't progressed as fast as it could, Ragsdale feels that improving economics could revive buying during the holiday season, just a few months away.
The dynamics of the chip industry also suggest that Intel's pain might be short-lived. "With a drop in unit demand and a slide in average selling price, chip downturns always go a lot faster than growth periods," said Eric Ross of Thomas Weisel Partners. Monthly sales went from less than $10 billion to $19 billion in two and a half years and keeled over in just a third of the time.
Ross, who has a "market perform" on Intel, sees too many factors currently affecting Intel to change his stance. "Bias in revenues is still lower," he said of Intel's most recent outlook. "People know the name, and it's the only semiconductor company they're invested in," said Ross, who sees more investing potential in Texas Instruments, AMD or Micron Technology right now.
Intel remains a pricey stock. Its trailing price-to-earnings ratio is 39, a hefty valuation compared with AMD's 7.9. But AMD's shares have dropped to $16.70 from $35 in just three months. Intel has hugged the $30 mark.
Salomon's Joseph and Lehman's Niles, with their Monday reports, cooled down a brief fire ignited last Wednesday when Merrill Lynch's global semiconductor analysts upgraded many chip stocks. Sector investors picked up Intel shares even though they weren't specifically mentioned. The same thing happened on Tuesday when Credit Suisse First Boston analyst Charlie Glavin downgraded the sector to a "Hold." He had already downgraded Intel in February.
Glavin wrote that any seasonal upturn for chips "is unlikely to constitute the typically strong reacceleration associated with industry upturns." He noted diminished IT budgets and underutilized semiconductor plants. He also suggested that the slowdown in June billing data, which showed a strong drop-off in U.S. chip purchases, has yet to hit Asia.
The reaction of Intel's share price to the clear controversy in the analyst community is to hang tough. It's down from its highs, but it isn't making any new lows. It seems the investment decision to make right now is not whether Intel will drop further, but whether there is another stock with more upside.
Goldman's Ragsdale contends that Intel is his favorite stock in the sector, though it isn't on the bank's vaunted recommended list. Coupled with the milquetoast comments of other analysts, this suggests that it isn't yet time for Intel.
But that time might be getting closer.
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