Andy So: Trent's Wrong On Intel. Why It Makes for an Excellent Long Play in 2007

Includes: AMD, INTC
by: Andy So

This is the first article in a two article series in reference to a William Trent article. Mr. Trent’s article covers his view on a few semiconductor companies we jointly follow.

In an earlier article I wrote, I proposed to Mr. Trent that Technology + Applications = Probable Success. I suggested that Mr. Trent read a preliminary performance preview of Intel’s (NASDAQ:INTC) Core 2 Quad processor on HardOCP, a computer enthusiast website.

Mr. Trent responded in his article that I had left users out of my formula and that unlike myself and my fellow enthusiasts, there just wasn’t that much of a crisis to simply download the free public beta of Windows Vista RC1 and a 1080p Windows High Definition [HD] video. These were two activities I suggested Mr. Trent follow to evaluate whether his computer was up to speed for Vista. My year old average computer skipped quite a bit on the task of playing the 1080P Windows HD video. Playing HD video from a disc format or from downloaded HD videos will be an activity that I believe will become common place in the short to medium-term future.

When Mr. Trent wrote that I had left users out of the picture, the first person I thought of was legendary investor Peter Lynch, the former star manager of Fidelity’s Magellan Fund. In Lynch’s book “One Up On Wall Street,” he makes an important point that the most basic way to evaluate an investment is to use the service or product. When Lynch was beginning his research on La Quinta Motor Inns, the first thing he did was stay three nights in three different La Quintas. When the semiconductor industry is going through a cycle change, like it is now, there is no way for a normal consumer to use upcoming products. Neither Mr. Trent nor I can tell you for certain where the technology users will be. Consumers have to rely on the press and the computer enthusiasts like HardOCP. I value the data from enthusiasts to make investment decisions because they are so willing to void the warranties of computer processors to see how far a specific architecture like the Intel Core 2 Duo or Quad can be pushed. This is something you won’t find from the mainstream media and something that can help you avoid investing in upcoming architectures that aren’t as commercially scalable as you had hoped. When press and enthusiasts both endorse a product, you have a better idea where users may go.

Mr. Lynch also writes in “One Up in Wall Street” that it is human nature for doctors to endorse oil stocks and for oil tycoons to endorse pharmaceutical stocks. People tend to ignore the basic edge they have in the expertise they posses. There are few people better equipped than computer enthusiasts to sample and test semiconductor products, to tell you which products are working and have the most technical opportunity for success. The enthusiasts posses a simple edge a consumer can turn into their own investment advantage. You can further build your personal edge by engaging in activities like downloading the Windows Vista RC1 candidate and a Windows HD video.

This is an important summation in why I believed that Mr. Trent only saw half the picture when he presented his entirely accurate data on semiconductor inventories and the glum picture the data draws. Enough demand can change production increases or make additional investments into cutting edge manufacturing processes a wise decision by semiconductor firms. By combining the data Mr. Trent presents with a fundamental pictur,e you get a fuller view on making semiconductor investments.

Additional information from around the web on Intel and Microsoft Corporation (NASDAQ:MSFT) have lead me to have a bullish view on semiconductor firms in light of the growing semiconductor glut.

The Intel Core 2 Duo microprocessor currently powering the vast majority of new PC products is a superior performing product to Advanced Micro Devices' (NYSE:AMD) current offerings.

As evidence from computer hardware enthusiast websites like HardOCP point out, there is a lot of headroom to be found in the Core 2 Duo. Earlier reports from around the web show the Intel Core 2 Duo E6300 regularly approaching or breaking the 3Ghz barrier. The E6300 which has a default speed of 1.86Ghz is currently Intel’s least expensive Core 2 Duo processor.

The implications of these reports are enormous for investors in Intel. The high speeds reached by the E6300 show the scalability of the Core 2 Duo architecture. A large part of the scalability is no doubt a part of Intel’s shift to a 65 nanometer manufacturing process. Smaller manufacturing processes for Intel should mean more chips per wafer, improved power consumption and lowered heat output per processor. Analysts and enthusiasts are expecting AMD’s major shift to 65nm sometime in the middle of 2007. This gives Intel a comfortable lead and enough time to work out any cost or manufacturing inefficiencies as the company becomes more acquainted with the 65nm process. The benefits of the Intel Core 2 Duo and shift to 65nm should become more apparent as the company releases earnings in the first half of 2007. Intel has an opportunity to build consumer trust ahead of the 2007 holiday season.

There should be tremendous optimism in Intel if sales can improve and Intel can maintain a comfortable performance lead over AMD. Historians can take note that the last time Intel had such a scalable CPU as the E6300 was during the days of the Celeron 300A. The Celeron 300A was a 300Mhz CPU that regularly hit speeds of 450Mhz or a 50% speed increase. The E6300 is regularly capable of moving from 1.86Ghz to 3Ghz, a 62% speed increase. During the days of the Celeron 300A, Intel was a dominant force over AMD. I am a big fan of AMD’s Athlon XP products. As I have written in the past, it is hard for any company to follow up one hit with another. Even mighty Intel lost the performance crown during the last round of the CPU battle. With technology, developments move so fast there is no telling who will control the CPU performance crown in the long-term. With Microsoft’s Windows Vista around the corner for consumers in early 2007, I expect both Intel and AMD to benefit. Intel, however, appears to be in a better position to benefit from the new Microsoft OS with a superior performing product in the short-term.

Disclaimer: the author owns 5,000 shares of INTC purchased at an average price of $20.55.

INTC-AMD 1-yr comparison chart:

INTC-AMD 1-yr comparison chart