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Intel (INTC)

Updated as of Feb 2, 2000

Intel  - Summary

Results over the past 3 years

Business Outlook: Intel has some of the industry's best management and excellent product development and manufacturing technology. The revenue and earnings growth at Intel have slowed down as the company has grown. Intel dominates the PC CPU chip business and Intel's growth is driven by the growth in demand for PC's. Intel is moving to expand their business in networking chips, by the results of this have yet to be shown.

At the current pricing, Investors have to believe that Intel's revenue and earnings growth rates are going to be picking up from the historical levels. If the revenues were to continue to grow at 8% to 12% range then the current stock price seems pretty high for that growth rate. A more reasonable price for the stock would seem to be in the low 80's. 

Intel is the leader in semiconductors for PC's and is growing their market share in networking semiconductors. At the high end of PC's chips they have lead the market for years. Now, AMD is giving Intel a serious challenge with AMD's new 800MHz chips and faster 850 and 900 MHz chips coming in the spring of 2000. In the past Intel could respond to AMD's competition by cutting prices on the lower performance CPU's and keeping the margins high on the higher performance CPU's where AMD could not compete. Now, AMD has competitive processors over the full range of Intel's performance range. Price reductions to meet AMD competition will now cover the high performance and high margin processors as well as the lower range products. It is my projection that Intel's margins are going to be flat or reduced in the coming months.

Intel is sitting on a huge amount of unrealized capital gains from the investments they have made in related technology companies over the years. In Q4 the interest and capital gains contributed some 24% ($508M) to the quarters $2.1B earnings. While this helps turning in good performance, it also shows that the operational earnings from the chip business are under margin pressures.

In 1999 it is estimated that some 110 million PC's were sold worldwide, including servers, desktops, and laptops. In the fourth quarter estimates are that Intel shipped some 30 million CPU chips for PC's, so they would be at at run rate of some 120M PC CPU's per year!

Sales of semiconductors for networking chips are expected to grow at twice the rate of PC chips according to Dataquest. In 1999 Intel acquired 12 companies with a total value of some $6B to grow its business in networking semiconductors. Right now networking chips are about 5% ($1.5B) of Intel's business and are estimated to be growing (in sales) at 30% per year. However, in the fourth quarter this part of their business was flat or down.  (Sources: Intel Statements, Industry reports)

Intel is also making a large investment in going after the web hosting business (Intel Online Services). In 1999 IDC estimated that the web hosting industry did some $1.5B in business and this is projected to grow to $12B in 2003. Intel opened it first web hosting center in Santa Clara CA in Sept. 1999 and is expected to open 11 more during 2000. The next one is schedule for Fairfax County, Virginia in Q1 2000 and then Reading England in Q2 2000. (Sources: Intel Statements, Industry reports)

For 2000 Intel says, The company expects revenue for the first quarter of 2000 to be slightly down from fourth quarter revenue of $8.2 billion, due to seasonal factors. 

Gross margin percentage in the first quarter of 2000 is expected be approximately flat with the fourth quarter. Intel's gross margin expectation for 2000 is 61 percent, plus or minus a few points, compared to 59.7 percent for all of 1999. In the short term, Intel's gross margin percentage varies primarily with revenue levels and product mix as well as changes in unit costs.

Competitors: PC CPU chips - AMD, Network chips - Texas Instruments (TXN), Analog Devices (ADI), Conexant Systems (CNXT), 

My Position: I sold the stock as of Jan 18, 2000