Tech Industry

2HRS2GO: Intel stock still carries a lofty price

COMMENTARY -- You know Intel (Nasdaq: INTC) won't stay down for long, but maybe it should.

Yesterday's revenue warning caused shares of the world's largest maker of PC processors to gap down as expected this morning, but those huge opening drops almost always turn into one of those "mother of all buying opportunities" situations. People expect the turnaround, and to some extent they're getting it: Intel bounced off its low early in the trading session before stabilizing at roughly 20 percent below yesterday's close, and non-Intel processor makers have gained ground today.

Yet no one seems to be asking if Intel isn't due for a long-lasting correction. Plenty of folks seem to accept today's action as a one-time blip because of Europe, and some analysts point out the company still looks to post annual revenue growth of 17 percent, an improvement over the previous two years. So don't be surprised to see Intel's share price slowly rebound as bargain hunters come in.

Now consider the broader view.

The entire semiconductor industry suffered from a downturn in ྜྷ-ྞ, which carried over into Intel's results. The field spent most of 1999 recovering.

This year was supposed to be the first year completely free of the chip recession's effects. A growth year, an expansion period, solidly placed in the upward curve of the market cycle.

And 17 percent is all Intel expects to show for it. Compare that to its pre-downturn growth rates: 20 percent in 1997; 29 percent in 1996; 41 percent in 1995.

It's not all Intel's fault. Not many companies with 1999 revenue of $29.4 billion would be able to squeeze out any kind of double digit growth, let alone 17 percent.

But the company should take some of the blame. Intel's problems in pushing out high end chips have been discussed for at least a year now, and they're still around. It's not a large portion of the market, but it's bad for perception, which matters in the MHz-obssessed world of PCs. That stumble opened the door for real competition from Advanced Micro Devices (NYSE: AMD), whose chips are at least as fast, cheaper and more available relative to demand.

And all this is happening as Intel's core market is maturing. Buying the broadband and networking chip capabilities of Level One last year was supposed to help offset the expected slowdown in PC chips, but Intel hasn't been able to displace competitors such as Broadcom (Nasdaq: BRCM).

Yet Intel has remained the priciest stock of all large chipmakers. Even with today's decline, INTC is valued at nearly nine times book value, and 25 times estimated 2001 earnings.

By contrast, AMD trades at scarcely three times book value and only nine times next year's earnings estimate, which is pathetic by tech stock standards. As of early this afternoon, AMD's market cap stood at roughly 2 percent of Intel's.

Other chip markets' major companies, such as Texas Instruments (NYSE: TXN) and National Semiconductor (NYSE: NSM), also trade at lower price-to-book ratios than Intel. Texas Instruments carries a higher P-E, but TXN also reigns in a field -- wireless DSPs -- with higher growth prospects than PC processors.

This isn't meant as a slam against Intel. You can take Craig Barrett's team to task for its manufacturing problems and its insistence on giving investment gains the same weight as operational income, or you may simply dislike Intel's products, but this company remains a solid operation with a powerful market position.

Unfortunately, it's not a rapidly-growing business anymore. It might not even be the fastest growing company in its industry. Yet it's priced that way right now, even aftera 20 percent drop.

And because Intel is Intel, people will drag it higher again. The company would have to seriously crash and burn to lose Wall Street's good will.

Valuation metrics were thrown out the door long ago with market leaders like Intel, and even with the market's doldrums over the last several months, valuation has never truly come back for the big names. Given the huge amount of money flowing into the stock market these days, valuation standards probably never will return entirely.

But if they do, today's plunge will seem mild to Intel. The stock price still has plenty of expectations built into it.

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