Value in Intel, Steady Growth Ahead

Posted on April 26, 2007 , filed under Stocks | Print This Post

I caught a recent article on Intel Corporation (INTC) winning back market share from rival Advanced Micro Devices, Inc. (AMD).

Here is a quote taken from the article:

Santa Clara-based Intel gained about 6 percentage points of share in the first three months of the year, finishing the quarter with a commanding 80.5 percent of the worldwide market for desktop, laptop and server processors based on the popular x86 design, according to new data from Mercury Research.

I’ve mentioned the value behind Intel in previous articles and suggested that readers purchase the stock as a long-term holding at under $21. The article above underscores the importance of Intel’s R&D efforts and the results of launching a better line of CPU products over its rival AMD. Some writers have criticized Intel’s continued investment in new microprocessor fabrication technologies and the companies efforts to increase production scale. The company has recently announced an estimated $2.5 billion investment to create a state-of-the-art fabrication plant in China.

I believe the only way Intel can maintain its technological advantage is from continued investment. Intel’s cash, cash equivalents & short-term investments total over $9 Billion. The company’s ROA is 9.79% and ROE is 14.74%. Intel is a cash cow that can continue its current investment scale in new technologies with no short-term risk of going out of business. Intel’s cash position and ability to produce cash is the largest reason why I originally sought the company out as a value investment.

The semiconductor industry is highly cyclical and depending on your view of the industry, it is either in recovery mode and now set to rise to new heights or has grossly over-estimated demand and will soon consolidate. I believe the price of Intel’s shares have been beaten-down unfairly. The company has a superior line-up of products and market position over it’s major rival AMD. In recent weeks there has been talk of AMD having some risk of going-out of business or seeking a buy-out via private equity funds to stay in business. In the short-term, AMD’s financial problems should be viewed a negative event for both companies. In order for AMD to move more CPU products it will likely continue to engage in a price-war with Intel. The price-war inevitably leads to shrinking profit margins for both companies. The likelihood in the medium-term for AMD, is that the company will exhaust its ability to continue absorbing the negative effects of a price-war. Intel on the other hand, with its superior cash position, can afford to draw out a lengthy price-war in order to win market share.

The only medium to long-term risk for Intel investors is to watch out for a vastly superior technological CPU product from a competing company. It is unlikely that the company will ever return to the heydays of the 1980’s and 1990’s due to the proliferation of PC’s. China is one possible avenue for Intel to continue its growth. Intel’s investments in China are likely a long-term strategy that will not yield immediate short-term benefits. Intel investors should simply look forward to a stably growing company able to generate large amount of cash.

*Disclaimer: The author currently owns 2500 shares of INTC purchased at an average price of $20.55.

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2 Comments »

Comment by Robo Rat

2007-09-04 13:58:29

AMD is set to release its next generation micro-architecture next week Sept. 10. Design and manufacturing problems have limited its ability to compete with Intel while Intel is pushing forward with its transition to 45nm that will bring them better performance and better cost per unit. AMD’s stuck with this next generation product lagging behind Intel prohibiting them from raising ASPs until a better design comes along. Unfortunately their Fusion design will only come late 2009. So expect AMD to struggle while Intel continues to dominate with better products and higher ASPs.

You’re absolutely correct in your recommendation.

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Comment by Andy

2007-09-05 04:47:53

Thanks for the comment.

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