The Day Ahead: Give up on Intel at your peril

If you're willing to write off Intel because of a few problems this year, then more fool you, says Larry Barrett
Written by Larry Barrett, Contributor

Commentary: Considering the frantic selling of Intel shares Friday, it's a small miracle the Nasdaq composite only lost 25 points in the week's final trading day. But that tells us that investors aren't quite ready to give up on this bull market yet.

Following Intel's third-quarter warning, it and other stocks such as Oracle, Sun Microsystems and Cisco Systems lost $5 and $6 a share in after-hours trading Thursday. All the pieces seemed to be in place for a tech meltdown.

But it didn't happen.

After opening down more than 100 points, the Nasdaq composite made a steady recovery, ultimately closing off 25 points for the day and only 32 points for the week.

That's nothing considering the widespread panic that's enveloped the market in the past three weeks.

Profit warnings, sales warnings, rising oil prices and a weak euro have all contributed to a general sense of unease on Wall Street.

Recognising that Wall Street trades not on what you've done but what you will do in the future, it's understandable that Intel shares lost about 22 percent of their value Friday.

But let's put Intel's "problems" in proper perspective.

It said its third-quarter sales would only improve three percent to five percent this quarter. Not the usual ten percent, 15 percent or 25 percent that analysts and shareholders have come to expect.

Intel's still going to earn well in excess of $3bn this quarter.

Intel, Cisco, Microsoft, IBM... the list goes on and on of companies that return astounding profits and sales quarter after quarter and yet their stock price continues to stagnate.

There's nothing mysterious about it. It's all about the maths. The more successful a company is, the harder it is to continue putting up 55 percent year-over-year revenue growth. Sales can't continue to double every two years when you're talking in billion-dollar increments.

But Intel is one of the handful that are coming pretty damn close.

All these companies from every conceivable industry are blaming the weak quarter on the sluggish sales in Europe brought on by the plunging value of the European currency.

But we all know that some of Intel's problems go far beyond the euro or sales in Portugal.

About once a year, the entire technology sector picks a whipping-boy issue to serve as its scapegoat for poor sales and earnings. Last year, it was the Y2K thing. Before that it was Asia. And before that it was something else.

Ultimately, these systematic excuses are good for the market because it gives investors a chance to do a little bargain hunting. And we saw some of that late Friday.

Assuming that corporate PC spending really is dragging and pricing pressures are about to sting leading semiconductor manufacturers, is it really time to bail out of Intel?

One of my esteemed colleagues wrote a column Friday suggesting that even after the sell-off, Intel shares are still overvalued.

He points that even after the sell-off, Intel is trading at "nine times book value, and 25 times estimated 2001 earnings".

With all due respect, that's not even close to pricy in the real world of technology investing. And certainly not outrageous for a company of Intel's status and power.

Traditional investment parameters would rule out virtually all the technology stocks on the Nasdaq these days. Moreover, it would have stamped the likes of Cisco, Sun, Microsoft, Intel and dozens of others as unattractive three or five years ago.

And we all know how well that "sensible" investing would have panned out.

Like it or not, Intel will make a rousing recovery in the next two or three quarters and have investors asking themselves why they didn't buy it at $48 a share in September.

Will you be one of them?

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