It was only two months ago, on the last day of August, that shares of
It was only two months ago, on the last day of August, that shares ofIntel hit an all-time closing high of nearly $75, capping a relentless upward march from the split-adjusted price of just 24 cents when the chip maker went public in October 1971. Intel shares were up nearly eight-fold from the start of 1996, almost doubling since the start of 2000.
But then the stock plummeted, losing more than half its value in dropping to around $35 by mid-October.
Is Intel just another New Economy stock hitting the skids as investors get wise – as they did with dot-coms like Amazon, CDNow and Priceline?
Hardly. While Intel is indeed a high-tech company, it has little else in common with these troubled newcomers. “Intel is a very strong company in comparison with, say, Priceline, which is a very weak company,” says Wharton accounting professor Alvin H. Carley. Immediate problems may make Intel shares a risky investment in the short-term, but the company’s long-term prospects are excellent, Carley adds.
“This is a business that makes money. It’s different from Amazon.com, which has never proven an ability to make money,” notes Jeffrey A. Rosensweig, finance professor at Emory University’s Goizueta Business School. “I look at the world as divided into two sections. There are those that are profitable and those that are unlikely to ever be profitable.” Intel is in the first group, while most of the dot-coms are in the second. “Intel is a tremendously profitable company, one of the most profitable in the world,” he adds.
While many of the best-known dot-com stocks soared in 1999, the driving force was sheer investor exuberance. Not only was the typical dot-com losing money, its losses were ballooning. Investors were betting there would be stupendous profits someday, though the Internet-retailing world is so new that no one knows what it will take to put such companies into the black.
Next to the Amazons and Pricelines of the world, Intel looks positively old-fashioned. It has factories. It makes products that exist in the physical word. And it has been doing it for a long time. For the quarter ended Sept. 30, Intel reported net income of $2.5 billion, up from $1.46 billion for the period a year earlier. That came to 41 cents a share, up from 37 cents the previous quarter and 28 cents for the third quarter of 1999. This year the company is on a pace to beat its record earnings in 1999.
So what put its stock into a nosedive?
The biggest problem: Investors who had learned to expect extraordinary growth from Intel were shocked when the company warned in September that third-quarter sales would fall short of Wall Street analysts’ estimates. Intel said the main culprit was weak demand in Europe.
But this did not mean Intel’s customers were cooling on its products. Rather, European customers were hit by the sinking value of the euro relative to the dollar, making American products more expensive. And soaring oil prices were hurting European pocketbooks. “Foreign exchange gains and losses are a major concern for multi-nationals,” Carley says.
And foreign exchange problems in Europe are especially serious for Intel. Europe accounted for nearly $7.8 billion in revenue last year, compared to the $12.7 billion in revenues from the U.S. Meanwhile, revenues from Europe are likely to improve with a turnaround in the euro, Rosensweig says, noting that “a number of the world’s best companies are reporting the same problem.”
As a technology company, Intel has benefited from the investor enthusiasm that propelled that sector’s share prices in 1999 and early this year. Similarly, it was swept downward as investors worried that the entire sector had become too expensive. The tech-heavy Nasdaq Composite index has fallen about 30% from its March 10 peak.
Rosensweig says that since Intel is a mature, profitable company, investors do submit it to traditional forms of analysis, which they cannot, or will not, apply to the money-losing newcomers like the dot-coms.
When Intel’s price peaked in late August, shares were trading at about 54 times per-share earnings for the previous 12 months. This is high for a mature manufacturer. At the time, price-to-earnings ratios averaged about 30 for stocks in the Dow Jones Industrial Average and Standard & Poor’s 500. By mid-October, the price plunge had brought Intel’s PE ratio to a more reasonable 27.
Then the stock began a modest rebound, rising from the $35 range to about $43 on Oct. 24. The reason: Actual third-quarter results turned out a little better than investors had expected after hearing the company’s warning in September. Analysts had forecast profits of 38 cents a share; actual profits were 41 cents. The company said it had record revenues in all regions except Europe.
While the only solid figures available to investors are those measuring past performance, people buy stocks to bet on the future, and Wall Street analysts forecasting Intel’s immediate future have some concerns. For one thing, the problems in Europe could continue for some time.
On Oct. 24 only six analysts gave Intel their top rating of “strong buy”, compared to 20 who gave it that rating two months ago. Meanwhile, 19 gave it a lukewarm “buy” rating, compared to nine such ratings two months earlier, while “hold” ratings increased to five from three two months ago. (Analysts, who need to protect their access to corporate executives, rarely issue “sell” recommendations.)
It’s worth remembering though, that analysts generally address themselves to active traders with investing horizons of a year or less. Even as they reduced Intel’s ratings, many were optimistic for the long term. Analysts at Hambrecht & Quist were among the more upbeat, projecting an Intel rebound to $50 a share over the next 12 months. “We believe that the current stock price reflects all the expected bad news out there,” H&Q said in an Oct. 18 report.
Among those with a less than enthusiastic view was Merrill Lynch’s Joseph Osha, who last week lowered his rating from “buy” to “accumulate.” Sales are not likely to grow as fast this year as in the past two years and the company faces big expenses to produce new, faster chips, he said.
Every company – in every industry – faces the prospect of being eclipsed by a competitor with a technology breakthrough, says Carley, recalling the way inexpensive fiberglass fishing rods suddenly replaced split bamboo in the 1960s. But this seems less likely in Intel’s case, he adds. “In my opinion Intel would be substantially less vulnerable because it keeps itself on the cutting edge,” he said. “It is a leader in technology.”
In the long run, adds Rosensweig, Intel is likely to remain the dominant player because chip development is so monumentally expensive. “The company has a research engine that is second to none,” he said. “The larger players – the first entrants – usually win.”
Andy Grove, Intel’s chairman, should probably have the last word. Participating in a panel discussion in San Francisco on October 12, Grove said that having been in the high-tech business for some 30 years, he has seen innumerable ups and downs in the stock market as well as in the chip business. “And having seen many ups and downs, I much prefer to have ups and downs in the stock market than in our real business. In our real business, we have enormous value to offer to the economy… and the stock market is going to take care of itself.”
Lots of CEOs would say amen to that.