Wednesday, January 16, 2008

Intel Disappoints, But Stock is Undervalued

Sell-side analysts (those who work for Wall Street brokerage houses that make commissions by getting clients to buy and sell stocks) did not like Intel's Q4 results or forecast for 2008. Pricing by auction in the stock market made the price of Intel stock plunge today (by 12.25%) - no one wants to buy, if at the end of the day you can buy cheaper. In addition Intel stock was already cheap, like most stocks, because of the current liquidity squeeze.

In the Intel v. AMD tech war, I favor AMD, both because it is the traditional underdog and because it was innovating processor design in the opening years of this decade, which benefits everyone who uses personal computers. I think AMD stock is way cheap right now, but that does not blind me to the value of Intel stock.

If you want a lot of detail on Intel's (INTC) Q4 results and management's explanations, take a look at my analyst conference summary.

Here I'll focus on a couple of points. The first in Intel's guidance on Q1 2008 margins. Margins are the difference between revenues and expenses, so at a given level of revenues, higher margins are good. Intel expects margins to dip in Q1. The Wall Street geniuses acted like that was a big surprise and a reason to dump Intel stock.

But there are two main things accounting for the Q1 margin dip. First, demand for CPUs for microcomputers is seasonal, always peaking in Q4. Q1 revenues are expected to be lower; with many costs fixed, that in itself will lower margins.

Second, Intel sold its cell-phone processor division to Marvell (MRVL) last year. It made 2007 a trying year for Marvell because they paid cash for it. It was great for Intel because they got cash for a money-losing unit (Marvell expects it to become profitable in the very near future). Under the agreement Intel would continue manufacturing the processors until Marvell could arrange offshore manufacturing for them. That transition began in Q4 2007 and will be completed in Q1 2008 except for some legacy processors that Marvell did not think it worth tooling up to produce. Those legacy processors will still be sold by Intel to Marvell.

The margins were good on the Marvell processors, but now those revenues will go away. So the best guidance Intel can give is that Q1 revenues will be weaker than is the norm for the season.

At the same time, Intel said their inventories are thin. And with demand in India, China, and Russia charging ahead, I think they are being cautious in their predictions. Technology is still a growth area, and computers, even if they morph into cell phones, are the heart of modern technology.

According to the Intel page at NASDAQ, the company has a PE ratio of 16.86, which inverts to earnings on stock of 5.9%. With Intel expected to grow revenues 10% in 2008, and net income (profit) growing faster than revenues, that is a bargain price.

Along the same lines, I think that NVIDIA stock is a bargain today. I'll write about NVIDIA again after I hear their what they have to say at their analyst conference.

By way of disclaimer, I own AMD stock, but not NVIDIA or Intel stock.

Keep diverse!

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