Intel’s (INTC) anti-trust problems are all over the papers recently. In South Korea, anti-trust regulators have just fined Intel $25.5 million for anti-competitive practices (a judgement that Intel will appeal). In Europe, the anti-trust regulators are expected to conclude their investigations and issue a judgement soon. And in the US, the FTC has just formally opened an investigation into Intel’s business practices, after sitting on the anti-trust case filed by AMD (NYSE:AMD) back in 2005 for more than 2 years. Despite losing money hand over fist recently, AMD has not relented on its strategy of harassing Intel legally. AMD accuses Intel of selling its chips below cost to major PC manufacturers in order to induce them to boycott AMD’s products; Intel claims that it offered legitimate volume discounts to major PC manufacturers and have never sold its chips below cost. While offering inducements to customers to boycott a competitor’s products is a legally gray area, selling products below cost to gain market share is illegal in most countries, and the cases will probably turn on this last point.
I have previously written about Intel’s near-monopoly position as a long-term structural strength of the company that will allow it to earn returns above the cost of capital for a long time to come. Apparently, the price of this monopoly position is to be considered “guilty until proven innocent” by the government. While it is likely that more fines will be levied against Intel in the future, it is unlikely that this will dislodge Intel from its monopoly position. Microsoft (NASDAQ:MSFT) had numerous anti-trust fines levied against it without affecting its market share. Anti-trust commissions are answerable to consumers, and are aware that consumers have been the chief beneficiaries in the recent Intel attempt to drive down AMD’s market share. Any large fine which causes Intel to retrench from the market, or attempts to force Intel to up its product prices, is likely to be viewed very dimly by the public.
At current prices, I still find INTC to be a very attractive stock. Otellini’s strategy of squeezing AMD by taking temporary losses have been wildly successful, plunging AMD into a cash flow crisis and forcing AMD to outsource fabrication of its own chips, a cost-cutting move widely considered ill-advised by many analysts because it will hamper implementation of new chip designs and set AMD back in the chip research race. Intel has regained profitability in recent quarters, and has gained market share from AMD, especially in the high-margin server chip market, and has also regained the lead in introducing the fastest and most energy-efficient chips. Due to anti-trust concerns, I believe Otellini will not want to squeeze AMD completely out of the chip business, but would seek to confine AMD to a small market share in the low-margin PC chip market.
At the same time, Intel is branching into the cellphone chip market with the introduction of the Atom chip family, a high growth market with no signs of slowing. As the consumers in developing countries gain purchasing power, they will not only consume more oil and food, but will increasingly be able to afford more cellphones, desktops and laptops. With this international exposure, Intel is well-positioned to weather the US recession. In short, I believe that the end of the price war with AMD (and the resumption of greater than 40% profit margins) and the continued growth of overseas consumption of technological products will propel Intel’s earnings in the near future.
I believe that the chief strategic danger to Intel in the distant future will the be eventual unwillingness of foreign governments to rely exclusively on US-made chips due to national security concerns (similar concerns have forced Microsoft to disclose the source code of its flagship Windows OS to certain foreign governments, something which Microsoft has previously vowed never to do), and the possible emergence of a foreign competitor to Intel with the advantage of a protected domestic market. However, it should be quite some time before the developing countries develop this capability, although with AMD outsourcing its chip fabrication to Singapore and Taiwan, this day may now come sooner rather than later.
Disclosure: Author has a long position in INTC