INTC (NASDAQ)

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Intel Corporation (INTC, NASDAQ)

Whenever I think of technology, the vision of fast growing high risk, uncertain profits and computers come to mind. That vision is no more than preconditioned conventional wisdom, for many of the leading high tech companies are quickly changing themselves into solid long term growth companies. A handful of companies is leading this charge and Intel is one of those select few, along with Microsoft, Motorola and Texas Instruments.

This does not mean that there are no more small and fast growing high tech companies. There are dozens. But they are still part of the conventional picture. Whether they will ever reach the same pinnacle of success as Intel has, may very well depend upon whether their strategies resemble those of Intel or not.

Intel started out with a niche strategy a few years ago, building on the success of PC markets. But as other semiconductor manufacturers, it learned that the niche strategy only works if the niche you have selected doesn't remain a niche forever. It eventually turns to commodity except that by that time the originator has the lion's share. The business world is full of products and services that never achieved notoriety like the pet rock or the HDTV. It takes lot more than a great idea to make the world beat the path down to your door.

Intel recognized early on that its niche had significant potential. If PC's were living entities, Intel's products called the microprocessors or CPU's would be their heart. But the simile ends right there because this heart is evolving at an incredible rate. No more than five years ago, the company tested its first success by introducing what is called a 386 computer chip, making all the previous PC hearts outdated in one fell swoop. Not only did it quickly became the standard for most desktop PC but gave the first hint to the manufacturers that need for speed is long from satiated.

You may reach your own limit in speed when driving a car because of the impending doom should you crash or be just unable to handle the speed.  Having no such restriction when driving a PC--what's it going to do, recalculate your next year's taxes even before you clicked the mouse and send a copy to Revenue Canada--we want more. I suppose the terminal speed for PC's is our mental reaction time which is fast. How fast? Well, how long does it take you to add 6 to 8 in your mind?

Almost every couple of years, skeptics have raised a red flag as to the limits placed by Physics on the speed silicon chips can generate. But simple technical problems never stopped the scientists, next phase of computer systems are based on lasers or neurons, each, orders of magnitude faster than silicon.

Given the complexity of these technologies and the competitiveness of sharp minds, it is quite a feat that Intel has over 80% of the PC market. Their strategy  is based on pure research and development. They simply outsmart all other developers in the field in creating, testing and introducing new products that are far superior to their own previous generations. Competitors in their niche, like AMD, CYRIX and even IBM and Motorola just can't get there fast enough.

There may however be a limit to this geometrical progression of speed if the financial results are any indication. Intel's return on equity is now a mere 24% which is high but not what you would call stellar and their sales growth is dependent upon that fickle home PC buyer. The home PC could go the way of  colour TV, VCR and microwave ovens-- necessary but cheap. And the next phase in Intel's growth may take some doing. In other words, this niche too is showing its age and may be turning into commodity. Just like the actual PC manufacturers such as IBM, Apple, Compaq and Dell. How they manage this next phase in their development will be crucial in determining what price we would pay for Intel as a stock; 30 times EPS or 10.

CHARTS:

One of the first surprising result I found in this analysis is the P/E chart. It shows that in spite of all the excitement, Intel has very quickly transformed into just a growth company rather than a supercharged explosive stock. The full value for Intel is only 20  times its earnings, significantly lower than many others we have reviewed here. What we are witnessing is the transformation of a speculative stock into a long term profitable enterprise. 

The forecast EPS numbers  range from $4 to $6 for 1996. I am using last year's actual results as the low case and $4 for the best case. If you can live with only a mild growth next year, there is still a $20 reward if the stock achieves its fundamental value of $80.

Following inputs were used to derive the fundamental P/E;

Return on Equity   20%     Beta                1.40     Debt/Capital        0%     Plowback            90%

Last Updated May 12, 2000