The world’s largest computer-chip maker and Growth Portfolio holding, Intel (INTC) is once again making headlines thanks to its market dominance. Fresh off the latest agreement with the European Union to pay almost $1.5 billion to Advanced Micro Devices (AMD) to settle a four-year dispute, Intel is once again facing anti-competitive charges. Now the U.S. Federal Trade Commission has joined the party, alleging that the company has illegally used its dominant market position to suppress competition and strengthen its monopoly.
To be fair, the company is utterly dominant. Intel commands more than 80 percent of the world’s market for computer chips, completely dwarfing its competition. We don’t condone unfair practices that limit competition, but given its market share, we’re not surprised by the investigations facing the company. Neither is the company, who tried to settle with the FTC before the agency filed its complaint.
In terms of implications arising from the complaint, the most likely scenario is that the company pays hefty fines – like it has in the past to settle similar claims. And while this is certainly not a positive for the company’s bottom line, it serves to confirm something that we have been sure of for years now: Intel is one of the few true tech franchises – in command of a dominant market position that has lasted decades.
The increased scrutiny and investigations may serve to help some of the small players in the industry (like AMD or graphics chipmaker NVIDIA (NVDA)) in the short-term, but won’t create a longer-term threat to Intel. Tremendous cash reserves ($12.9 billion including near-term investments as of last quarter) on a strong balance allows Intel to engage in price wars and / or advertising wars without batting an eye. The strong financial position also gives the company tremendous ammunition in terms of research and development – spending billions to stay on the cutting edge of technology.
They have good reason to protect their market, too. Despite widespread belief that the tech boom ended in the late 1990s, that is certainly not the case. In fact, there is another tech boom underway, and this time it involves far more people too. We’re, of course, referring to the developing world, where incomes are rising and citizens are able to buy computers and get online for the first time. Intel is a player in this market, and continues to expand its presence.
The company gets over 80 percent of its revenue from outside the US, including over 60 percent from the Asia-Pacific region. Not only is the company growing these revenue streams, but when they are translated back to depreciating US dollars, they mean more in terms of profits, too.
In total, we expect earnings to grow by at least 10 percent a year. With a strong global footprint, and the financial strength to maintain (and perhaps grow) its dominance, we continue to like Intel as a cornerstone tech holding. Shares trade at only 13 times 2010 earnings estimates, and despite some near-term market jitters given the FTC investigation, we remain buyers of the stock.
Disclosure: Author has a position in INTC