Can Intel Face The Competition?

Jan.16.07 | About: Intel Corporation (INTC)

Intel (NASDAQ:INTC) is facing strong competition from Advanced Micro Devices (NYSE:AMD), which has led INTC to slash prices. For INTC, this pricing war resulted in lower revenue on higher unit sales. At the same time, inventory continued to grow, especially for chip sets and flash memory. An inventory pile up signals that the lower prices failed to clear inventory.

INTC is well positioned to benefit from a recovery in the MPU market in 2007 and investors are likely to see progress when the company reports Q4 results (partly due to a stronger uptake of Core 2 Duo mobile processors (Merom), as well as stronger momentum in servers).

Intel’s multiples might expand as management expects to recapture market share and improve the cost structure and margins over the next 18 months, thanks to scale-based strengths in R&D, manufacturing, and marketing. INTC recently released a new lineup of leading edge chips, which I see gaining traction with corporate customers.

The semiconductor industry is very cyclical in nature. Not to mention intensifying competition, which contributes to the often volatile environment of the industry, inventory levels and production capacity in the industry continue to be closely monitored in relation to the health of its latest cycle.

Coming back to my first point about inventories: by the end of the Q3, INTC's total inventories were up 145 million, sequentially. Inventories for chip sets and flash memory were higher, while for microprocessors it was lower.

Intel’s recent market share issues have resulted in compression of gross margin. Gross profit margin declined to 63.21% from 71.93% due to the write-off of older processor inventory, worth approximately 100 million and higher cost of sales.

A near-term catalyst is the Jan. 16th earnings call. The option market is pricing in a 4%-5% move around the January 16th announcement. Option prices may tell us what size move the market expects on earnings, but not the direction of the move.

INTC 1-yr chart