Intel Needs Its Paranoia Mantra More Than Ever

“When is a change really a strategic inflection point? Changes take place in business all the time. Some are minor, some are major. Some are transitory, some represent the beginning of a new era.”

--Intel Corp. Chairman Andrew Grove, from his book “Only the Paranoid Survive”

When Intel shares plunged nearly 13% last Thursday on the heels of the company’s projection of weaker-than-expected sales, the stock’s sellers might have argued that they were just following the advice in Andy Grove’s book title.

To wit: “If only the paranoid survive, maybe we should get out of Intel stock while the getting is still good.”

By Friday, Wall Street was reconsidering. The shares rose $2.56 to close at $78.13 after diving $10.88 on Thursday. For the week, the stock lost 13%, and it remains 22% below its all-time high of $100.50 last August 20.

For much of this decade, investors have been happy to leave the paranoia to Grove and his 64,000 employees, and simply reap the rewards of their spectacular business success.

In seven years, Intel has progressed from being an important but cyclically vulnerable technology company to being the undisputed king of Silicon Valley.

As the dominant global supplier of personal computer microprocessors--the brains that make the machines do what they do--Intel has both helped fuel the worldwide PC boom and profited handsomely from it.

The stock, adjusted for splits, has soared more than 22-fold from 1990’s low of $3.50, while the average blue-chip stock has risen

threefold. And with $25 billion in annual sales, 1.6 billion shares outstanding and a market value of $125 billion, Intel has become a market, and industry, bellwether in every sense.

The problem with being a leader, of course, is that your missteps become as well-publicized as your successes, if not more so. High visibility makes for an easy target.

And when your stock is one of the market’s most-owned, it is extremely vulnerable to mass defection if investors begin to fear that your future won’t be anywhere near as bright as your past.

Think of IBM Corp. between 1989 and 1993, when its shares plummeted from $65 to $21 as the market came to understand how the center of power in the computer business was shifting from mainframe to desktop.

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That constituted a “strategic inflection point” for IBM, the type Intel’s Grove goes on about at length in his 1996 book.

“An inflection point occurs where the old strategic picture dissolves and gives way to the new, allowing [a] business to ascend to new heights,” Grove wrote. “However, if you don’t navigate your way through an inflection point, you go through a peak and after the peak the business declines.”

With Thursday’s announcement of a 10% sales shortfall this quarter versus last, Intel has clearly lost momentum in its business overall. As is often the case, Wall Street smelled trouble long before--which is why Intel stock, despite rallies over the last six months, couldn’t retake its August peak.

Whether this is truly a strategic inflection point for Intel or just a minor bump in the road probably will be clear only in retrospect. Either way, what’s important from an investor’s viewpoint is that the company quickly adjusts, assuring that sales and earnings regain momentum and reignite the stock.

Intel faces two major challenges. One is the rising popularity of under-$1,000 PCs, which require lower-priced microprocessors. All else being equal, Intel would naturally prefer to sell high-priced chips for high-priced PCs.

Intel’s competitors, such as Advanced Micro Devices Inc., have made significant inroads in supplying cheaper chips. But Intel is there too and wants more: It has a heavy calendar of lower-priced PC chip introductions planned for spring.

The company’s second major challenge may be more vexing. Demand is booming for chips in non-PC appliances, such as video game players and cable TV set-top boxes, but cost is even more of an issue there. Many of those buyers are aggravated by Intel’s prices.

John Malone, head of cable TV giant Tele-Communications Inc., just Friday reiterated that Intel won’t be picked to supply chips for the next generation of cable set-top boxes because of price issues.

“You can’t give all the money to Intel and still meet your price objective” with the consumer, Malone told Bloomberg News.

Is Malone just jawboning? Maybe. But he is a powerful player in an important market, one of many non-PC markets that Intel acknowledges it must participate in for long-term growth.

A greater presence by Intel in those markets would smooth out temporary inventory adjustments in the PC business, Intel’s bread and butter for the foreseeable future. (An inventory adjustment on the part of PC makers is what this quarter’s Intel sales drop may be mostly about, analysts say.)

Intel’s problems are relative, of course. Analysts now expect 1998 earnings of about $3.22 a share, down 17% from $3.87 in 1997. The lower number would still give Intel a profit exceeding $5 billion, which in turn would keep feeding its huge research efforts--a key to its long-term success.

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Still, it would probably be smart for Intel investors, and would-be investors, to heed Chairman Grove’s generic advice about being more paranoid than smug.

All through the 1990s, Intel has largely controlled pricing of its chips. Intel has slashed prices, to be sure--but on its own schedule, ensuring tremendous, consistent profit growth along the way.

Always a paranoid, aggressive competitor, Intel now may have to become even more so. And if pricing will be sacrificed to a greater degree, near-term profit also may be sacrificed, as well as consistency.

Until 1996, Intel was still viewed as a cyclical company, and its stock price-to-earnings ratio reflected that, staying in the low teens. Today the stock is priced at 24 times estimated 1998 earnings. The broad market’s P/E, too, is far higher than pre-’96. But short-term, if investors again come to view Intel as more cyclical than the average blue chip, 24 may be a rich P/E.

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Tom Petruno can be reached at tom.petruno@latimes.com

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Intel’s Long Climb

Quarterly closes and latest for Intel Corp. stock:

Friday: $78.13

Note: Prices are adjusted for splits. Stock trades on Nasdaq.

Source: Bloomberg News