Intel: Finally Tuned for Fearless Paranoia

Includes: AMD, INTC, NVDA
by: Michael Steinberg

Intel (NASDAQ:INTC) founder Andy Grove said that “only the paranoid survive.” This kept the early Intel at the forefront of semiconductor design and manufacturing. While manufacturing has never fallen behind competitors, design innovation had given way to dirty tricks over the past decade. AMD stunned Intel with innovation while Intel’s dirty tricks culminated in a billion dollar plus settlement. Intel went through an unhealthy period where paranoia turned to fear.

It could be argued that AMD’s sole innovations were onboard memory controllers and 64 bit processors that were software compatible with Intel’s 32 bit processors. And Intel’s misstep of the lack of compatibility in its first round of 64 bit processors. Intel has not brought memory controllers onboard processors until very recently.

I think the issue is far more complex than product. Intel had gone into a mode of product life cycle management similar to the games being played by the auto and pharmaceutical industries. This emanates from a fear that a company will run out of real innovations, so they have to milk existing products with faux innovations and play dirty tricks on their competitors, customers and consumers.

Intel was caught flat footed when AMD went multicore at the expense of clock speed to save power. Intel’s temporary fix was to paste two single cores together in the same package, then scramble to catch up.

Intel has more than caught up technically, but something as important has also changed in the company’s management and culture. Intel’s tick-tock strategy is in full swing. Each year they alternate between design innovation and manufacturing innovation. At this point it would be difficult for AMD to amass the resources to catch up. So this leaves Intel to compete with themselves.

When I wrote "Intel’s Confusing Consumer Portfolio", I thought Intel was still playing product life cycle management to its own detriment. After the recent Core i3, i5, i7 announcement, I changed my mind. Intel has shown that it has released its fear and now sees itself as a company with a bottomless well of new product innovation.

Listening to Intel’s Q4, 2009 earnings conference call, I got the feeling the analysts cannot differentiate between healthy paranoia and unhealthy fear. Too many questions focused on the fear that the low-end Atom processor (used in netbooks) would steal sales from higher end notebook processors. Even when the analysts were told this was not happening, they took little solace in Intel’s push to embed the Atom processor in all kinds of new mobile devices.

Daimler (DAI) killed Chrysler because they feared Chrysler would cheapen their prized Mercedes Benz brand. The analysts were trying to convince Intel to kill its baby processor before (in the analysts’ minds) the baby kills its bigger siblings. Analysts were even more taken aback when Intel said it will continuing to lower prices to drive volume, giving it a higher overall bottom line. With spare 45nm capacity, Intel did not fear running out of 32nm capacity. The company has flexibility in product mix.

Intel is showing the fearless energy that I first noticed in the small biotech Isis (ISIS). Isis believes that it can develop an endless stream of new drugs and is not worried about one drug cannibalizing another. Both Intel and Isis are paranoid about protecting their technical leadership, but neither is operated from a position of fear.

So now that the Pentium is finally dead and Intel’s gross margin is projected to be above 60% for all of 2010, it’s time to push Intel’s stock price back to the mid-$20s. I envision trading Intel between the mid-teens and mid-twenties throughout 2010. I think that Intel will follow general market sentiment during 2010, so I don’t take the initial luke-warm reaction to Intel’s earnings too seriously.

Some final words of caution: Intel announced a setback in its attempt to enter AMD and Nvidia’s (NASDAQ:NVDA) world of discreet graphics. And throwing a 45nm graphics core on top of two 32nm processing cores in a single package is a bit lame. Intel has publicly stated the limits of this application.

Personally, I would go with Intel’s 45nm Core i7 Quad with discreet graphics. It has all the bells and whistles of the 32nm processers plus two more cores. The slower processing speed is made up with Intel’s “Turbo Boost.” Sony (NYSE:SNE) has a new i7 Quad with Nvidia graphics starting at about $1000.

Disclosures: Author is long INTC and ISIS.