Intel Connecting to Internet Shows Why Stocks Fly High
Intel in recent weeks has revealed a new direction for the coming decades and, incidentally, shown us why the stock market is as high as it is.
The specific news last week was mundane enough. Intel reported second-quarter earnings 29% lower than last year’s, but its stock price rose because management was optimistic about coming quarters. You don’t learn much from such short-term information.
But the stock market’s enthusiasm--it has taken Intel up almost 14% in the last two weeks--stems from a new series of microprocessors called Xeon that Intel has just introduced. The Xeon chip is not for the personal computers with “Intel Inside” that have made the Santa Clara-based company a global technology leader and a highly profitable company with $25 billion in sales and more than $10 billion in pretax earnings.
The Xeon processor is for larger machines called servers that run engineering workstations and computer networks, including Internet and intranets that allow companies to communicate with customers, suppliers and employees. Server sales, driven by increased use of networks, are now outpacing sales of personal computers.
“I’m convinced that the growth of Internet commerce will be far greater than any estimates now predict,” says Craig Barrett, Intel’s president and chief executive. “Dell Computer already sells $5 billion worth of computers a year online.”
So like Microsoft, which is bringing out higher-powered operating systems for servers, Intel is expanding its product line into more complex fields. In the next two years, it will bring out more powerful versions of the Xeon series. In 2000 or early 2001, Intel will introduce the Merced processor in an alliance with Hewlett-Packard. Merced promises to have many times the capabilities of today’s chips and yet be compatible with computers currently in use.
The new devices will make Intel a supplier to computers costing $100,000 and up, the kind that process millions of credit card transactions or model weather patterns. It will have new competition from IBM, Sun Microsystems and Hewlett-Packard, among others, but will benefit from the high profit margins in the more complex and expensive end of the business.
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One reason Intel is moving to new fields is that growth and profits have diminished in personal computers. “The PC order has peaked, it’s time for the next wave,” says Paul Saffo, senior analyst of Institute for the Future, a Silicon Valley research firm.
In a bonanza for consumers, competition has reduced PC prices to less than $1,000 in many cases. Intel supplies microprocessors to roughly 80% of all PCs, so it does better than its competitors. And it will keep its place in the PC business, because markets are growing in Latin America and Europe and were growing very rapidly in Asia until the crisis hit.
But the excitement of new business lies with the Internet, which is expected to grow in use by the public even faster in the next decade than it has to date. The factor holding back consumer use of the Internet has been lack of bandwidth, the communication capability to easily and inexpensively perform interactive, videophone-like functions on the Net. Companies account for 75% of Internet use today.
Yet the public is eager, as witness the growth of e-mail, online sales of books and flowers and transmissions of children’s pictures to grandparents. So communications companies are getting serious about beefing up the bandwidth. It’s one of the goals of AT&T;’s proposed merger with cable company Tele-Communications Inc.
Jeffrey Cole, director of the UCLA Center for Communication Policy, predicts that 75% of U.S. households will have Internet-capable computers by 2005. That compares with 45% that have computers and 18% that have Internet connections today. Cole, whose center is launching a multiyear, nationwide study of 2,000 households titled “Surveying the Digital Future,” says, “The Internet is being accepted faster than television was in the 1950s.”
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That’s why the stock market has been bidding up Internet stocks and buying technology stocks in general. Investors may get overenthusiastic for Yahoo and other Internet companies. But their enthusiasm realizes a larger truth: That a new industry covering communications, entertainment, finance and education--at the least--is being born.
Yes, but how does Intel fit into that brave new Internet world? The key will be that everything, from data to voice to pictures will be transmitted digitally, says Barrett. “If you want to create digital content and transmit it, you need processing, and that’s an opportunity for Intel,” Barrett says.
Receiving digital information passively, as in watching television today, may not present new opportunities for processing. “But if you want to interact with digital content, processing and user interface will be necessary and those are opportunities for Intel,” he says.
Nobody can predict the ultimate form of the new medium--a combination television and computer or a terminal on the Internet. But whatever it is, Barrett says, Intel will be there.
Many analysts agree. Mark Edelstone, technology analyst at Morgan Stanley, sees the Xeon chip leading to the Merced as “the triumph of the Intel architecture,” meaning the company’s form of processing will be the standard in the new computing age as it has been over most of the last two decades.
It will be a neat trick if Intel can do that. Technology leaders in one era seldom lead in the next. IBM, once a monarch, is now just a big computer company; AT&T;, once the dominant force in telecommunications, is a stumbling giant.
More important, if Intel’s new chips succeed, they will set the global standard. Because in electronics and computing and other technology fields, the simple fact is that U.S. companies set the world standard. Investment in moving forward is one reason they do.
Intel this year will invest more than $7.5 billion in plants and equipment and research and development. Like many high-tech firms, it never invests less than 10% of its sales in R&D.; The payoff for all that investment is the progression of new industries, new opportunities. And that’s a big reason the stock market is as high as it is.
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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.
