Saturday, January 07, 2006

Intel (INTC) Analysis

Intel along with Microsoft has ruled the roost for quite some time as the Wintel duopoly. Both the companies are now at cross roads with rivals AMD/Sandisk and Google/Apple threatening to run away with both the revenues and limelight. In this section, let us analyze Intel and see how the balance sheet looks like and compare it to AMD to see how things will unfold for the semiconductor giant.

First let us look into the balance sheets. Intel has a healthy balance sheet and good cash flow. It has got two groups, Digital Enterprise Group and Mobility Group. The first group focusses on microprocessors and motherboard. The second group focusses on flash memory, wireless processor and chipsets. Comparing the quarter ended in July and the one in October, Intel has grown revenues by 8% quarter over quarter. The microprocessor business has increased the revenues by 6% quarter over quarter. The mobility business unit increased revenues by 12.5%.
Intel revenues increased by 17.5% year over year. The number of outstanding shares also decreased by about 300 million because of the share buy backs. The total number of outstanding shares has consistently decreased over the past few years at Intel. Long term debt has decreased year over year to 753 million from 855 million. The stock holders equity declined year over year to 36.6 billion from 38.6 billion. Despite the large increase in revenue, the diluted earnings per share increased by only 6.7% in the quarter ending in September 2005 compared to September 2004. The decrease in earnings is mainly because of increased cost structure. Year over year, the intel earnings are up by about 21%.

There are some positive factors in Intel's earnings and some not so good factors. Positive factors - increased profit margins in the microprocessor business and increase in revenue in the wireless and microprocessor business units. Apple is going to migrate to x86 chipset and usage of Intel chips should give some boost. The balance sheet and cash flow are definitely the other positives. The Q over Q revenue growth of 7.9% is definitely a good sign. The negative factors - AMD is growing 25% quarter over quarter and has a huge lead in x64 bit chipset market. Defection from key vendors such as Dell to AMD processor can cause problems to Intel. Refurbished AMD64 machines are currently available for $400=00 in Fries Electronics. As more people are going for AMD64 OS, Intel doesnt have a solution in a market that it has dominated for decades. Intel has also given up the lead on Flash memory to companies such as SanDisk as year over year revenues in this segment is pretty much flat. Intel also made a half hearted attempt in its foray in to the digital TV with the LCOS chipset.

Intel is not a cheap stock. It has a trailing P/E of 19 and forward P/E of 18. The next couple of years would be crucial for Intel. Like Microsoft, the new leadership at Intel is from the sales organization as opposed to the engineering organization. Both Microsoft and Intel have made some significant strategic blunders and need to execute flawlessly to remain competitive for the next ten years. At this time, it is better to own Intel through some ETF ( IVV, SPY )- like Spiders or Nasdaq Qubes ( QQQQ ) as opposed to owning the stock directly.

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