Has Intel Finally Dropped Far Enough?

The short interest in Intel (NASD:INTC) rose 18.7 million shares between February 15 and March 15 to 71.9 million shares. That's a big move in the short interest for a large cap stock. Intel has also lost $54 billion in market cap since the summer of 2005. According to Forbes (www.forbes.com), there are only 48 companies in the US that even have a market cap above $54 billion.

Since conventional wisdom in the business press is that improvements in the products of Advanced Micro Devices( NYSE:AMD) is the primary cause of Intel's troubles, it is not surprising that that stock is up from about $14 a year ago to $36 now, adding over $10 billion to its market cap.

Caris & Co. analyst Rick Whittington recently noticed a build up in inventories for the aging Intel Prescott x86 chips, but saw no such inventory issues at AMD. He sees this as a sign that customers are moving to the AMD product.

AMD announced with much jubilation in early March that it now supplies half the chips to China PC giant Levono Group. Reuters pointed out at the time that AMD's share in China had risen from 5% in 2001 to 18% in 2004, much of it at Intel's expense.

The question becomes whether or not to bet against Intel at $19, a price it has not seen since the fall of 2004?

Intel recently announced their new chips with "Core" technology. These chips should have improved performance while using less power. Intel also announced new WiFi chips and PCI cards. If WiFi does not rule the world of broadband now, it certainly is gaining on that goal. In-Stat (www.in-stat.com) sees mobile chips growing from 140 million annual chipsets in 2005 to 420 million in 2009. Intel also announced its new "Santa Rosa" chip features which allows devices to boot up more quickly.

Granted, Intel has been a financial disappointment. Intel revised revenue guidance downward for the quarter ending March 31. At the time, RBC Capital Markets analyst Apijit Walia told Forbes "future quarter growth estimates may get lowered further".

With Intel's stock falling, it is easy to forget its still substantial advantages over virtually all of its competitors. Intel did $38.8 billion in revenue in 2005. Operating income was over $12 billion. Perhaps most impressive, R&D spending was $5.1 billion according to Morningstar (www.morningstar.com). Intel's top line has risen 74% between 2002 and 2005. Hardly a dog.

Intel now trades at a PE of 14 against the S&P 500 average of 22. Looking at the same numbers supplied by Morningstar for AMD, their PE stands at 90.3. AMD's R&D budget is $1.1 billion and its operating income was $232 million in 2005.

According to Intel, 150 million people will begin using wireless devices this year. Intel's Core Duo processor and new WiMax technology position the company very well for the latter part of this calendar year and into 2007, as demand in these sections of computing rises. Is Intel likely to have to weather a slump over the next few months? Yes. It is likely that they deserve their current stock price based on metrics like PE and the improving outlook for mobile and wireless computing.

I don't think so.


Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He was also the president of Switchboard.com when it was the 10th most visited website in the world, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc., and in the past was on the boards of TheStreet.com and Edgar Online.