There we have it. Reporting better than expected April quarter earnings, long-time Analog Devices CEO Jerry Fishman said, “We don’t listen to the gurus, just our customers.” No better encapsulation of the past two years could be had, when investors would have done far better to turn off the news programs, roll up their sleeves and read a litany of company and economic press releases. Replete with improving order trends from overseas – requiring advanced capital goods made in the U.S., Germany, Japan and other developed nations – American electronics components and industrial suppliers are now seen to be benefiting from expansive global growth.
Intel’s annual analyst meeting earlier this week noted how PC purchases inflect upwards when purchasing power drops to 4-8 weeks of an individual’s earnings. China is now moving into the sweet spot the U.S., western Europe and Japan occupied twenty-five years ago – a position that was then filled by Asian Tigers and eastern Europe in the past fifteen years. China’s billion-plus consumers are being joined today by India’s billion-plus, and another two billion are on the way, extending growth for chips for years to come. Since PC use now means plugging into an increasingly capable and productive Internet, the implication is profound for corollary demand for other electronics equipment. Yes, the gurus missed all this (and more), centered in their New York and Washington echo chambers, each vying to be more bearish on stocks and negative on America than the prior broadcaster. The world’s best and brightest professors, investment managers, analysts, consultants and – oxymoronically – politicians and media presenters missed this corporate and enterprise renaissance. Negativity filled the airwaves these past two-plus years of steadily rising economic indicators; indicators that have been around for decades that for some inexplicable reason were just plain ignored. Instead of listening to companies speak of upside opportunity and innovative new products, negativity reigned supreme.
Now that stocks have soared from their early 2009 bottom, some say its all gone too far, that the protracted stagnation they predicted back then is about to fall down upon a now optimistic business world, ending the bull run. This is certainly not the message of Intel or Analog Devices, however, with each putting forth a story of continued robust expansion for their individual businesses. These two companies are about as different as two semiconductor makers can be; the former is a maker of digital computers on a chip and the latter of analog circuits interfacing the real world of temperature, touch, sound, motion and other natural phenomena to digitally control electronics made by others.
Added to programmable logic kingpin Altera’s bullish outlook, the views just put forth by Intel and Analog Devices point to a strong electronics market over the next several years. Intel reminded folks that the boom in smartphones and tablets means tremendous need for computing, storage and communications paraphernalia increasingly being run off their microprocessors. Even as Intel’s chips for energy draining data centers operated by Google, Amazon and other tech giants get larger and more expensive, their value proposition in curbing power consumption and minimizing site footprints is imparting higher margins.
As Intel brings on its incredibly innovative 3-D manufacturing plants later this year –initially at 22nm line widths that drop to 14nm in 2014 – it will put so much data center capability onto a single processor that their share of the total cost will rise, fueling revenue growth well beyond that of the now ubiquitous Cloud. This increasingly consequential business segment, roughly one-third of the company’s total, already generates 50% operating margins with 32nm chips. At 22nm, Intel’s Data Center Group will move to 55% and at 14nm 60% operating margin, way beyond the profitability of Cloud stocks routinely garnering P/Es 3x-5x that of Intel’s.
The reason Intel’s P/E multiple remains so low in the face of two years of strong sales and earnings gains is Wall Street’s view that smartphones and tablets are permanently crippling the remainder of the company’s revenues, especially its mainstay PC Client Group, which at 50% of revenues generates a “mere” 30% operating margin. This is the segment benefiting today from rising incomes in emerging markets but also from a corporate refresh tied to Windows 7. Notebooks now represent two-thirds of PC sales and lighter, faster and longer battery life notebooks are in the market. This year’s first quarter chipset glitch has been fixed, and an even more powerful version is on the way this summer.
Apple’s innovative MacAir notebook form factor is being aggressively facilitated by Intel to other vendors. Samsung 7 has already sparked an Apple infringement lawsuit, its solid-state NAND Flash memory chips replacing heavy and power-draining magnetic hard disk drives. Apple’s latest Macs prominently feature Intel’s iCore processor family, as well as its hugely innovative (and near-term exclusive to Apple) Thunderbolt ultra high-speed peripheral connection ports. As Intel and Micron ramp up low-cost NAND output over the next several years, the former will offer integrated microprocessor, solid state drive and optical connectivity to an increasingly beholden PC world.
In short, Intel is cementing in its leadership in PCs right as it comes straight at the ARM incumbents in mobile devices – tablets first, smartphones later. Thus far, it has paid to be dubious and skeptical on Intel futures in this rapid growth arena. The company has repeatedly made the mistake of introducing prospective product launches that never materialize. This is a mistake Apple no longer makes, and Intel would do well to pay heed. Yet this is rear view mirror, and not the forward look on which the amount of upside in Intel’s stock hinge. With its dividend just hiked again by a whopping 16%, the Intel shares are worth $40 just on their legacy segments. Mobile is a whole other thing.
Because Intel’s thermal signature drops like a stone with 22nm and then plunges still further at 14nm, the mobile devices that can be built with them will be thinner, lighter, more powerful than anything the ARM camp can come up with the next five years. This time lag is because the foundries such as Taiwan’s TSMC or Samsung won’t have anything like Intel’s about-to-be-launched manufacturing wherewithal for years to come. With its last major innovation – metal gates and hi-K dielectrics five years ago – just coming into volume production elsewhere, the 3-D approach dovetails with acute Intel design activity in mobile for the first time.
For sure Intel was consumed fending off last decade’s AMD threat and getting its manufacturing house back in order, caught napping the past two years by what has turned into an iPad goldmine for Apple. Left to atrophy under its prior CEO, Intel’s current top brass initiated crash projects to get back on top in both chip architecture and manufacturing technique, resulting in massive pressure on PC rival AMD, and now graphics processing innovator nVidia. Already integrating graphics onto the processor itself at 32nm, Intel shifts to a whole new arena for the first time as these design skills are applied to tablets later this year and then shift to 22nm next year.