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Thursday, February 26, 2009

Intel @ GS conference

Speaking at the Goldman conference, CEO Paul Ottelini indicated business has found a near-term baseline – orders have reached a level where they’re predictable, though still not particularly strong.  He believes inventory is low in the channel and that customers are ordering exactly what they need, therefore any incremental demand shifts either positive or negative will influence Intel’s results – there’s no cushion at all.

The presentation focused on the impact of netbooks.  Investors are concerned about the cannibalization of the higher end processor business by the low cost, low power Atom processor.  According to Intel, only 20% of netbooks purchased are being bought instead of low end notebooks – the rest are either first time PC owners or incremental units to users that wouldn’t have otherwise bought another PC.  Furthermore, Intel makes more gross margin dollars on an Atom processor than they do on a Celeron.  He downplayed the processor power of the Atom, saying the lower performance would keep the Atom from taking significant share from the higher end of Intel’s line.  Otellini’s comments positioned Intel’s atom processor squarely in the mobile processor market – Intel sees the Atom as a logical smartphone building block.  Qualcomm too is pitching investors on the smartphone brain story with their Snapdragon platform.  Clearly they’ll be duking it out over the next couple of years.

Otellini pointed to the decrepit PC base as a source of stability in sales.  300 million units of the installed base are 4 years old and much of the installed base has been shifting to notebooks over the last few years – notebooks just don’t live as long due to their portable and therefore vulnerable form factor.  The PC has become an essential information tool.  He does not believe people will simply forgo a PC purchase if theirs isn’t working.

The Skew:  Predictable demand and low channel inventories are clearly positive.  Netbooks are cannibalizing sales – those customers would have bought a cheap notebook otherwise – they needed to have a computer to take with them.  My netbook seems able to handle quite a bit of load – if anything, I’ve been pleasantly surprised by how much it can do, not disappointed by how little it can do.  I agree that notebooks don’t last as long – I go through one every couple of years.  Intel trades at roughly 16* 2010 estimates of 80 cents, which makes it cheap historically but expensive absolutely.  This company has not grown for several years and I would argue it deserves a multiple closer to 10-12* earnings, which would put it at $8-10.  Despite this longer-term valuation concern, I was long the stock into the presentation on the hopes they would indicate some better volumes in February versus January, which I believe to be the case.

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