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Now Intel's a buy -- right?
It's 30 percent cheaper than just a few weeks ago. But that's not saying much.
June 17, 2002: 4:38 PM EDT
By Adam Lashinsky, CNN/Money Contributing Columnist

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PALO ALTO, Calif. (CNN/Money) - Intel's been getting thrashed in the past couple of weeks, but the bear argument against the stock has been the same for months.

Basically, the story went that Intel wasn't growing very fast because its primary market -- chips for PCs -- stank. And because valuations were nonetheless way too high, the stock couldn't hold.

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It didn't.

You read that argument here a few times, most forcefully back in March, under the soothing headline "Is Intel's run over?", when the stock traded in the low $30-range.

Following last week's disclosure that Intel's (INTC: up $1.28 to $22.56, Research, Estimates) second-quarter revenue will be lower than expected and that profit margins are eroding, the stock was hammered, ending the week at $21.28. So in retrospect Intel's shares were ridiculous at their 52-week high of $36.78, pricey in the low $30s now?

No way, says a longtime bear on Intel who has helped inform this column's worldview on chips for the longest time. Here's the nugget to consider if you want in on Intel at $22 and change. In 1996, Intel earned 74 cents per share, adjusted for subsequent stock splits. Back then the company was just beginning its run as a monopoly provider of PC chips. The stock made impressive gains that year, moving from the $7 range to around $16 (again, scrubbed for splits).

So to make the math straightforward, in the year before Intel began an amazing ride, its shares ranged from 9.5 times to 21.6 times eventual actual earnings.

This year analysts expect Intel to earn 60 cents per share -- 37 times projected earnings. If earnings come in at less than 60 cents (not implausible given how wrong the analysts have been so far), the multiple gets even scarier.

Plenty could go right for Intel. Its investments in new product areas could be great. Americans could suddenly decide they need more PCs. The rest of the industry might stink so much that Intel shines in comparison. And there certainly is a price that's "cheap" for Intel. It's 9.5 times 2002 earnings, or $5.70 per share. If you see that price, back up the truck.

IPO follow through. I was wrong in February when I predicted shares of PayPal (PYPL: down $1.32 to $22.40, Research, Estimates), wouldn't see $20 again any time soon. The shares ran as high as $30.48 on May 30, reflecting continued enthusiasm for the online payments company used primarily by customers and vendors on the eBay auction service.

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I stick to the warning, however, that supply and demand will even out as employees dump more shares onto the open market. Currently just 9 percent of PayPal's shares outstanding are actually available for trading. The company signaled just how quickly that will change when it announced recently a secondary stock offering that will include large sales by its senior management, including CEO Peter Thiel.

How can they do that? Easy, they just ask your permission by filing with the SEC and then they sell them. PayPal appears to be doing great. It's about to break even, except for the messy charges you'd rather not hear about, and its revenues figure to be somewhere over $200 million this year. And the market capitalization is more than $1.3 billion. If I could sell my founder's shares I acquired for pennies, I'd do it too. In a heartbeat.

Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at

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