Friday, March 31, 2006

Intel Corp; INTC Part II April 1, 2006

John Chew, a wonderful analyst, has kindly shared his excellent analysis on Intel vs. AMD.

Summary of Intel vs. AMD (by John Chew)

  1. He discovered that Intel Corp has consistently high ROIC, while AMD has variable ROIC. 3 out of 6 years, AMD has negative ROIC.
  2. Intel far outspends AMD in R&D and has shown a strong commitment to increasing its R&D as a percentage of sales over the past five years as R&D expenditures have increased from 8%/10% of sales prior to 2000 to 14% to 15%. Intel spends on average 5X more in R&D than AMD. This should enable Intel to win the “war”.

Another brilliant friend of mine, Arpit Ranka, points out one of the crucial factor to consider. Below is what he wrote….

“The first question that comes into my mind is Intel is 115 B dollar company. A 40% appreciation would mean that the market cap should get to 161 B. Now for every percentage of point of investment return you'd expect the market cap to approximately grow by $1B!!”

There is a wonderful article published in Fortune in year 2002 about “Too Big to Fly”. It talked about why superior companies like Coca Cola, Microsoft, GE, Cisco, etc. find it hard to achieve superior return, which is related to their sizes.

To read the article, please visit:

Last but not least, Terence Tan, another brilliant thinker, points out to me…..

R&D ≠ Success

This is what he said, “Shell spends more on oil discovery than ExxonMobil or BP. But it has not managed to find enough oil to replace it's stock compared to Exxon or BP. So R&D expenditure not necessarily clear indicator of future success.”

In conclusions:

Besides doing all the standard analysis on companies, we should also pay attention to:

  1. Consistency of results.
  2. Company’s size.
  3. R&D may not equal success.

If you find this discussion helpful or if you have anything else to add, shoot me an email. Remember, sharing is the best way to learn.

To read Intel's analysis:

All the best,
Dah Hui Lau (David)

April 1, 2006:

In response to big size limiting return, John Chew, has shared another great point. This is what he said...

"Intel, MSFT, Coke, CISCO are all behmouths--they became huge through their dominance, so their size will limit returns vs. a smaller cap company, so I don't dispute what your friend said.

However, what you give up in returns you may pick up in safety through their consistent slower growth IF the management knows they are over capitalized and return cash to shareholders through buybacks and dividends.

MSFT is essentially a utility company--they control 95% of the operating systems market and they earn 100%+ returns on tangible capital, the problem is what do they do with the cash? Let it sit on the balance sheet, deworseify, or give it back to shareholders. If mgt. returns cash to shareholders then buying at a 30% discount to IV with IV growing through 4% to 6% organic growth and 4% to 6% share buybacks or dividend yield is not bad given that it probably will be hard for the market to average much above 6% over the next few years."

I couldn't have agreed more of what John has said. Buying great companies below intrinsic value, with great management, and organic growth of 4-6%, and share buybacks, will definitely enable investors to beat the market average. And most importantly, this strategy will enable investors sleep well at night.

All the best,

Dah Hui Lau (David)

To visit my archive:

1 comment:

Anonymous said...

The two ways Intel can capture market share are:
1. Tech. New contracts always go to the company with the best tech. This is how AMD took enterprise market share with the Opteron. Intel's new product roadmap looks to be much better than AMD's.

2. Price. Whenever AMD gets near 20% market share Intel will start lowering prices. AMD is now approaching this level in servers and Intel has recently announce it will start slashing prices.

Recently Intel has changed its strategy to focus on platforms due to the success of Centrino. By selling multiple pieces of silicon that work in synergy they can charge more and create a better product. They can also better adapt their products to meet the needs of new markets (Home, Enterprise, Health and Emerging Countries)

The only advantage AMD has over Intel is the Opteron. Every other product Intel is better (mobile) or comparable (desktop). AMD has yet to respond to Intel's new Conroe (desktop) and Woodcrest (server) processors which are clearly dessimating AMD's architecture in the benchmarks.

In short, the general computing public still thinks AMD makes better processors than Intel.

The only thing that make me bearish on Intel is the shakiness of the general economy. But given the necessity of tech in business and upcoming release of Vista, INTC is *very* attracticve at the prices. Now is the time to start a dollar cost average buy of INTC options over the next year.