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Intel faces margin pressures
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August 25, 1997: 4:33 p.m. ET
But venture capitalist McNamee tells CNNfn he is bullish on chip maker
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NEW YORK (CNNfn) - Technology watchers began the week Monday sorting out a wild Friday trading session that sent Intel Corp. shares down on speculation that computer makers may be scaling back chip purchases.
Intel shares Friday were off as much as 6-14/16 before gaining some of that back to end off 2-3/16 to 96-3/16. On Monday, they closed down 1-15/16 at 94-3/16.
At the center of the tumble is Merrill Lynch analyst Thomas Kurlak, who suggested holders of Intel and its competitors should sell now to avoid a price fall brought on by sagging demand.
Kurlak predicted that early next year, computer sales would slow, prompting makers to buy fewer chips and lower their inventory levels.
Of course, not everyone agrees with Kurlak. Among them is Roger McNamee, general partner of the venture capital firm Integral Capital Partners.
McNamee appeared on CNNfn's "Digital Jam" with anchor Steve Young. Following are excerpts from their conversation:
YOUNG: Roger, you're taking umbrage with analyst Tom Kurlak?
MCNAMEE: Oh, I wouldn't go that far, Steve, but I think the key point here is there's nothing new in what Mr. Kurlak said on Friday. I think Intel has been dealing with competition in its market for years and years and has done a terrific job of holding off Advanced Micro Devices and others. And I don't see any reason to believe this time will be any different.
The key message that Tom Kurlak made on Friday -- and I think this is the message investors have to pay attention to -- was that Intel's margin structure is likely to work its way downward, not upward, over the next few quarters. Intel hit record margins in the March quarter, and my sense is that at that level -- 64 percent -- the company does invite a tremendous amount of competition. Going forward, I think margins will be lower, but I don't expect Intel as a business to suffer that much from it.
YOUNG: Well, I think that one of Kurlak's points is that Intel is going to be mightily challenged trying to transition people to Pentium II.
MCNAMEE: Well, history shows that Intel's greatest single strength is its ability to convince customers to upgrade to the latest and greatest microprocessors. I think they're doing a very good job of positioning Pentium II as the next logical step. When the average customer upgrades, they're going to buy the latest and greatest part they can afford. Intel's done a great job of that in the past. I don't see anything changing there.
YOUNG: Well, one of the things, Roger, that many people say needs to change is there needs to be more software that exploits MMX and the powers of Pentium II. Right or wrong?
MCNAMEE: Oh, absolutely correct. I think Intel's greatest challenge right now is that it has been able to innovate on a much more rapid rate than the software industry. The company in fact has been counting on new applications, things like video-teleconferencing, to step up and really soak up some of that processing power that's available in the latest chips. Those applications have been slow to come to market and very slow to be used by customers.
That said, though, I think, if you look at the typical PC in a business today, people are still using the same applications that they were using three, four or even 10 or 15 years ago. And, oddly enough, they're doing it with processors that are literally hundreds of times as fast as they used to be, doing exactly the same applications just a little bit better. They're very happy about that.
YOUNG: Is Intel going to be in the sub- $800 PCs?
MCNAMEE: Well, this is the really key question for Intel right now. They didn't get to 64 percent gross margins because they were shipping lots of inexpensive parts. The company had gotten where it is by shipping the most powerful, the most expensive products in the market which have huge margins in them. And I think going forward, the opportunity is there for Intel to serve a much, much larger market at aggressive, low price points.
But I think the company has made a corporate decision not to pursue that opportunity. I think they're willing to let the clones have that low ground, even if that means giving up some share points. My own view is, though, that there is a limit to how long Intel can follow this strategy. The opportunity to make a PC today for $800 will soon be translated into a PC for $500, and I think eventually for about $300. And if Intel chooses not to play in that business, it's going to see its share-- at least of the unit volume in the industry-- come way, way down over the coming decade.
YOUNG: Roger, as you know, [on] Friday Intel's stock was pointing in just one way-straight down. It's been kind of zigging and zagging today. But for those who are concerned about what Kurlak said, would you advise at these levels to buy Intel?
MCNAMEE: Well, I think Intel is one of those stocks that people can, generally speaking, buy and hold. There are very few technology stocks that are like that, but I think Intel is one of that rare breed. I think the issue going forward is very simply this: Does Intel measure up well against other stocks in this category? The one thing you absolutely know is that if microprocessor prices come down, that's a huge boon for PC makers. And I think if Intel's share declines, that's a boon for other people who sell semiconductors into PCs.
So, I think the opportunity may be elsewhere in that same group. I think Intel's still a good stock to hold, but I think there are other ones that will out-perform it in this environment going forward.
YOUNG: Such as?
MCNAMEE: Well, I think you want to start with Intel's customers. I think that companies like Dell and Compaq participate enormously every time the microprocessor prices come down. I think you also want to take a very good look at Advanced Micro Devices and some of the folks who sell other chips inside the PC; folks like PMC-Sierra, Cirrus Logic and S3 . I think there are opportunities for all of these companies in the coming year.
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