January 19, 2007
Intel’s underclocked earnings
So Intel has a technological lead with its spiffing new dual-core and quad-core processors, it has a manufacturing lead with its smaller, more cost-efficient 65-nanometre chip circuitry and yet its margins remain below 50 per cent.
This was the big disappointment of its fourth-quarter earnings and first-quarter forecast this week. Margins were more than 60 per cent a year earlier with older products, inferior to its rival Advanced Micro Devices, that were made on 90nm chips.
The reason margins and profits will disappoint in 2007, despite its best new product line in years, is Intel’s apparent determination to grind AMD into the dust.
Intel intends to keep its prices low to win market share and it is accelerating its cycle of innovation to try to take an unassailable technological lead.
There will be two-year renewals of its architecture instead of five, while further miniaturisation will take place every other year now.
All this costs money and eats into margins – start-up costs for 45nm manufacturing will subtract a couple of percentage points this year and Intel will probably struggle to get full utilisation out of older plant being left behind.
Reasserting its traditional dominance over AMD will play well for Intel in the long term but it will not satisfy investors looking for a boost to dividends and a share price that has been in a long slump.
Joe Osha, Merrill Lynch semiconductor analyst, says in a report that what has happened to Intel is simple: it has created too much manufacturing capacity.
“Until Intel starts to think more about running its business for returns and less about market share and the next process node, results are likely to continue to disappoint,” he said.
“Above all, we think that there would be real opportunity if Intel management accepted the fact that the processor market is now a duopoly, albeit a lopsided one, and acted accordingly.”
The evidence is to the contrary and Merrill Lynch sees Intel as a company with peak earnings power of $1.20 to $1.30 a share as a result.
By Intel’s processor standards, that represents an underclocking of the company’s earnings potential and Wall Street is not happy.
