Intel's part in the drama of the moment stands out in at least three ways. As the hands-down global leader in the advancement of low-cost microprocessor computing power, something which has found its way into just about every economic activity which is measurable (and some that aren't), it is indeed a worthwhile indicator of how the global economy is faring . It is also what I like to call a locomotive of innovation (akin to Boeing in the aerospace world) which must be moving forward for all the other cars in the train to get anywhere. This "train" moves ahead because it is able to deliver, at declining real cost, something that great and growing masses of humanity want to make more use of, resulting in a virtuous cycle of increased consumption funding further innovation driving lower costs begetting increased consumption. Finally, there is the part about what Intel has delivered these past two quarters that is entirely to the credit of Intel, a company of outstanding DNA which seemed to have lost its way, but once the dose of humility had been swallowed found its way back to its stuff of greatness.
It is not my normal practice to own mega-cap stocks, but INTC presented something of a classic opportunity a couple of years back. At the time (late 2006, early 2007), I was enamored by the observation that the "big blue chips" were at close to record low valuations. I have subsequently come to conclusion that in most cases there are probably good reasons for this apparent "cheapness", but only time will tell us what they are (unless I have a little brainstorm, in which case I will.) The real motivation for looking at and eventually buying INTC was that it was a paragon of world-changing innovation that had seemingly lost its way. In 2006, there was this crazy notion that its one and only competitor of note, AMD, had arrived as more or less of a peer and would inexorably eat into Intel's 75%+ market share. There was just a bit of a kernel of truth for this whopper to take root in, as AMD had achieved a performance breakthrough in a line of server chips that put Intel in a catch-up mode for the first time in a very long time. The stock had been a dog since Y2K. Indeed, in mid 2006 it was not far off of its 2002 Tech Bust/Bear Market low despite solid sales and earnings growth.
Despite my rather trailing edge orientation to IT and CE (I own one vintage 1993 TV which is used as a monitor for a DVD player.), the life changing nature of that global phenomenon that is Web 2.0 is not lost on me. And as previously suggested, if any company is the locomotive of innovation pulling this construct forward, it's Intel. It was helpful that its financial posture was so strong (lots of cash, with more pouring in daily; minimal debt. Not every so-called "blue chip" has this going for it, and when the wind starts blowing in the direction it did in 2008 the weak holders who own because its a blue chip sell it with about as much thought as went into buying it.) What really helped, though, was that clarity and candor which often takes hold when a great company has been laid low. That opacity which one usually encounters when trying to get to know a typical mega cap was in this case greatly ameliorated. I had the good fortune of connecting with an IR person, since retired, who patiently helped me up the learning curve and arranged for me to participate in some very helpful conversations. The more I looked and listened, the more apparent it was that the DNA which made this company great was still there and that a chastened management was determined to get the company back on its game. I also increased my understanding of how pervasive the roll-out of Web 2.0 was likely to be, and got to thinking about the manifold changes which will occur as a result.
All of this work did not quite get me to a "buy" decision. Despite its modest relative stature, AMD seemed to have done well enough to convince the leading customers that they could be a reliable clear alternative to Intel. With this in mind, as of late 2006 it seemed that past financial performance was unlikely to be replicated. In that world order, it seemed more likely than not that increased competition would cause margins to trend lower over time. All this changed, however, when AMD bet the ranch on a big acquisition. While we had no idea how this would affect AMD over time, we knew that there would be no immediate benefit, and it was crystal clear that AMD had put itself in a position of greatly diminished financial flexibility and so no margin of safety against unforeseeable adverse developments. This lead to a purchase decision which looked really smart for a time, at least until the Financial Panic of 2008 changed everything.
These past two earnings releases by Intel are telling us many things. They are indicating that while the global economy was rendered briefly catatonic by the financial panic, it is coming back to life. The rising tide is lifting all but the most dry-rotted of boats, but it is lifting some of them faster than others (i.e., the ones which leverage the longstanding strengths of the U.S. economy, such as its deep pools of intellectual capital, to serve truly global markets). Intel is leading the way in this recovery because it is leading the way in providing for a very basic need, that human desire for connectedness on terms of one's own choosing. That is what Web 2.0 is all about. It never really stopped, other than for about six months in the manufacturing chain when folks crawled under their desks and waited for someone else to sound an all clear. Even more so than the economy in general, the resiliency of this has been badly underestimated.
Also underestimated, IMO, is Intel itself. Since arriving at that moment of truth that was 2006, they really went after their costs and their processes. From Q3 08 through Q1 09 the effects were masked, but they came out shining in Q2 and Q3. AMD is still out there, and the customer base will see to it that there continues to be some kind of alternative to the big dog on the block, but Intel seems to be calling the tune as to what prices will be (i.e., bringing them down at a pace which spurs volume but optimizes profitability). If there is anything at all to Web 2.0, this growing connectivity and increasing ubiquity of computing power, in the households of the second richest billion as well as the richest billion people, then barring an economic relapse INTC has a very promising half decade or so ahead of it. One wonders if the analysts who have spent the past decade following INTC are any better equipped to understand its prospects as an investment today than those who followed it through the 1990s were ten years ago.
This consideration of decades gets me thinking about just how long it has been since the Tech sector has had a truly silly season. The Tech Bubble and its subsequent deflation is getting to be a very long time ago. (How long ago does the demise of Lehman et al and the emotions that gripped those days seem already? It feels positively past-life to me.) This is not to say that at least some issues are not at what will prove to be ludicrous valuations already. Who knows what the next ten years will tell us about what GOOG, thus far a one-trick-pony if ever there was one, was really worth. Or MSFT, which hasn't really gotten anything but optimizing its ancient cash machine right for what, fifteen years?, reduced to a point where the reason to own it is that 7 will not screw them up like Vista did. But when I shift my thinking to Price Reality, to that which accounts for the lion's share of stock price movement, I can't help but wonder if we are not due for something of a reprise of the Tech Bubble, the blow-off phase of Web 2.0.
My sense is that barring the usual unforeseeable disruptors, a silly season revolving around the enablers, purveyors, providers, pretenders and panderers of Web 2.0 is inevitable sometime in the coming decade. This is not the sort of thing that is worth trying to predict, but the experienced investor will equip himself so as to be able to recognize it before it is too well developed to do anything but short the sucker (and probably get killed doing so prematurely). What Web 2.0 is about strikes so deeply into that which makes us human that I feel fairly certain that it will once again be the backbone of a major global Bull Market. Having revisited the sheer proportions of what the NDQ did in the 1990s (about doubling in the first six years, then doubling again in the next three, then more than doubling again in 18 or so months), it is quite clear that it took a very long time to cultivate the degree of silliness which defined 1999. My sense is that Web 2.0 is a little too close to ripe for this much time to play out. More likely, it will be a somewhat less dramatic affair than that, sometime within the next five or so years.
A little more earthbound way of thinking about the prospects for outsized gains in stocks like INTC might derive from the notion that the 1980s did not exactly prepare analysts and investors for how to think about INTC for the 1990s. Likewise, the experience of the 90s was less than helpful in terms of anticipating what it would be like to own most tech stocks for most of the decade that is now drawing to a close. I strongly suspect the tide is way out in the ways that matter most, and that success (outstanding returns) will revolve around financial flexibility but even more around being the "last man standing" (or nearly last, as the customer base goes all out to keep the "clear alternative" in the game) in critical, next-to-impossible-to-replicate technology. My personal orientation to this can be seen in the List, as well as some small holdings in AMAT, DELL, KEME and MSFT. (These aggregate 2.5% of my liquid net worth, and could be described as among the last bits of residue from my prior employment situation.) INTC stands at 2.0%. If I am right, if the parts of the global technology supply chain which these companies represent have evolved to a point of relative rationality, if the human propensity to desire connectedness on one's own terms is what I understand it to be, and global economic activity does anything but roll over and die, these stocks ought to appreciate over the next five or so years in a way that beats the bejeebers out of whatever inflation starts to rear its ugly head in the mean time. And really, at the end of the day, that's about all we can hope to do in our little affiliation with Mr. Market.
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