Santa Clara-based Intel gained about 6 percentage points of share in the first three months of the year, finishing the quarter with a commanding 80.5 percent of the worldwide market for desktop, laptop and server processors based on the popular x86 design, according to new data from Mercury Research.
I’ve mentioned the value behind Intel in previous articles and suggested that readers purchase the stock as a long-term holding at under $21. The above article underscores the importance of Intel’s R&D efforts and highlights the results of launching a better line of CPU products over its rival AMD. Despite this, some writers have criticized Intel’s continued investment in new microprocessor fabrication technologies and its efforts to increase production scale. It recently announced an estimated $2.5 billion investment to create a state-of-the-art fabrication plant in China.
I believe the only way Intel can maintain its technological advantage is from continued investment. Intel’s cash, cash equivalents and short-term investments total over $9 billion. Its [ROA] is 9.79% and [ROE] is 14.74%. Intel is a cash cow that can continue its current investment scale in new technologies with no short-term risk of going out of business. Intel’s cash position, and its ability to produce cash is the major reason why I originally sought the company out as a valuable investment.
The semiconductor industry is highly cyclical and depending on your view of the industry, it is either in recovery mode and about to rise to new heights or has grossly over-estimated demand and will soon consolidate. I believe the price of Intel’s shares have been beaten-down unfairly. The company has a superior line-up of products and market position over its major rival AMD. In recent weeks there has been talk of AMD having some risk of going out of business or seeking a buy-out via private equity funds in order to stay in business. In the short-term, AMD’s financial problems should be viewed a negative event for both companies.
In order for AMD to move more CPU products it will likely continue to engage in a price-war with Intel. The price-war inevitably leads to shrinking profit margins for both companies. The likelihood is that in the medium-term for AMD, the company will exhaust its ability to continue absorbing the negative effects of a price-war. Intel on the other hand, with its superior cash position, can afford to draw out a lengthy price-war in order to win an increased market share.
The only medium to long-term risk for Intel investors is to watch out for the introduction of a vastly superior technological CPU product from a competing company. It is unlikely that the company will ever return to the heydays of the 1980’s and 1990’s due to the proliferation of PC's. China is one possible avenue for Intel to continue its growth. Intel’s investments in China are likely a long-term strategy that will not yield immediate short-term benefits. Intel investors should simply look forward to a stably growing company that is able to generate large amounts of cash.
Disclosure: The author currently owns 2500 shares of INTC purchased at an average price of $20.55.
INTC vs AMD 1-yr chart