Intel – Chipper Long-term Prospects
Intel is unloved right now. AMD is kicking its butt on the low end and making inroads in high end chips. Inventory is building up in the channel, margins are compressing, and analysts are downgrading the stock. Intel’s stock has made very little progress in the last nine years. However, on a PE basis INTC is cheaper than it has been since 1996. It is trading at below a 15 PE – even less if you back out its cash. INTC has over $10 billion in net cash and is actively buying $25 billion of its own stock. The dividend is 2%. Apple is using Intel chips (and gaining share). Windows Vista is about to be released which could drive a new upgrade cycle in PCs. Intel’s competitive troubles with AMD may take longer to sort out, but INTC has the resources and infrastructure to out-innovate AMD. AMD may be ahead on performance, but Intel is pulling ahead in price-performance, power consumption, and smaller chip-making infrastructure. Intel is expanding via consumer electronics (with VIIV), NAND memory (a JV with Micron), and mobile chips (with XScale).
In short, Intel is a contrarian play. Sure, it could get worse before it gets better as AMD continues to steal share and the inventory backlog gets worked out. But with INTC buying back shares, you should rejoice if the price keeps declining – you and Intel can buy more for less.
Is Asia the Fountain of Youth? My take is that Asia presents the greatest opportunity for Intel. Intel CEO described China as the fountain of youth for computing. China, India and the rest of Asia comprise an opportunity more than twice the size of the current developed world over the coming 20 years. With less than 10% of each country online and likely less than 5% with computers, the long term opportunity is huge. It is my belief that almost every household in the world will have a computer at some point (just like TV’s in the US today). Heck, even Russia has a computer penetration of only 20% according to BusinessWeek.
Will Desktop Linux and OpenOffice remove the Microsoft software tax? In more price sensitive foreign countries, a computer fully loaded with Microsoft software could be prohibitively expensive. As free open-source alternatives to Microsoft’s products become viable for third world consumers, prices of computers with pre-installed software will drop (Microsoft will likely drop their prices in these countries too). Fortunately for Intel, every computer still needs a processor! Admittedly, many of these processors may be on the low end, but there will be a spectrum of demand.
Currency play? Asia’s share of Intel’s sales is now 60% and growing – they are selling to the manufacturers. Given that Asian currencies are expected to strengthen over the next decade as China’s currency policy allows for floating, Intel’s stock could be a very smart bet on strengthening Asian currencies. As Asian currencies strengthen, Intel will get a boost to dollar denominated revenue and profits. Intel does hedge currency fluctuations for 12 months forward, but over the medium to long term, they should benefit tremendously.
Disclosure: I am long INTC and MSFT. I also own calls on MSFT. I was recently long AMD but have almost sold out of my position (all I have left is spoken for via in-the-money covered calls).