now? Whither the market now?
To understand how intertwined those two questions are, consider: The chipmaking giant is not only the bellwether stock for much of the tech sector, it is also one of two stocks --
being the other -- listed on both the
Dow Jones Industrial Average and the
Nasdaq Composite Index. And fund investors, prick up your ears: Intel is in more than 1,000 stock funds, or roughly one in four.
The stock was off 21% at $48.19 in midday trading Friday after the company warned of weakening revenue. So, the outlook for the company -- and the market, which is feeling Intel's pain, to say the least -- has taken on an added urgency.
We put the question to the "smart money" in the mutual-fund world: What does the Intel shortfall mean for the company and for tech stocks in the fourth quarter? As expected, there is no consensus.
Patrick Dorsey, Morningstar's director of stock analysis:
Essentially this is the market getting through its fat skull that Intel's a big fat company that can't just keep growing at 30%.
has made a mockery of the law of large numbers, but few companies can do that.
For Intel, it means that despite their
acquisition and their expansion beyond PCs, they're still a PC company and the PC market is maturing. Intel is a mature, large company, and the market is just adjusting to that fact. I don't think it's being oversold, I just think it was way too expensive before the warning. They just set the bar too high.
In their latest conference call before this, they were too optimistic and the fundamentals weren't good enough to keep the stock at $70 per share. It's coming close to fair value, but I wouldn't call it a screaming buy here. It still has a forward
price-to-earnings multiple that's high for a company that isn't growing all that fast.
I think for the sector, it says that the market is really nervous. The shortfall isn't really that bad; it's clearly not the end of the world because even the shortfall leaves them with great growth for a big company. I think the reaction shows that tech stocks have been pushed to heights that are clearly unsustainable and even just a whiff of bad news sends them way down.
Diminishing War Horses
Michael Sandifer, a portfolio manager at Amerindo Investment Advisors, which runs the (ATCHX) Amerindo Technology fund and the Amerindo Internet B2B fund:
The client-server paradigm shift that preceded the Internet is in its waning phase. So we're not surprised by the announcement since the Internet way of doing things is superseding and slowing companies like Intel's growth.
We are currently, and in an increasing way, using the Net as our computing and communications platform. Increasingly applications that previously resided on a desktop or a server are going to be on the Internet. In the client-server world, all of us buy our applications and put them on our PC. Now that will be on the Net, which is cheaper and more efficient. That's a big change. Who wins and who loses changes. The old war horses of tech, Intel and Microsoft, and people who make PCs -- those companies will see their growth diminish. What wins in the Internet is very broad. Relative to Intel, those folks providing specialized chips optimized for the Net are doing really well. That's people like
As for the sector, I think we've always been in a stock pickers market. It will have an impact on psychology, but the fact that we're not off more than we are, that's encouraging. The fourth quarter is certainly stronger than the third quarter for tech stocks. The fundamentals for the major players in the Net space are dramatically good. The B2B sector is doing phenomenally well; we like companies there like
The Stock's Worth $65
In terms of the company, all I can do is look at the body of evidence out there and form an opinion. The evidence out there is that, at face value, Intel has experienced a problem with demand for microprocessors in Europe. Thus far the evidence has limited this to a European problem just for Intel. It appears to have been a surprise that Microsoft,
aren't seeing the same weakness.
This gives some credence to the notion that European customers were ordering more microprocessors than they needed earlier in the year because they figured they'd get less than they asked for -- like a portfolio manager asking for more
IPO shares than they want because he'll get less than he asks for. That situation, plus the euro weakness, made the lower demand have a bigger effect than it would've had otherwise.
But when I look at Intel's new earnings expectations, I still see a company whose earnings are up 30% for the quarter and 40% for the year. Even at $47 the stock is up for the year. I think people have to appreciate that even with this selloff, this has been a good stock to own this year. There is not a lot of hot air here. This is not a profitless dot-com; it's a leader with great margins and earnings.
Trying to figure out what they'll earn next year is a dicey proposition. But even if their earnings were flat, I still think the stock is worth $65 today.
For the sector, I think the bottom line is that it's too late to sell the stock, and the evidence suggests it's really an Intel situation, so it shouldn't drag down the whole sector. There is an indication of a broader reduction in tech spending, but that's not the most likely case, so I won't invest on that.
Don Luskin, portfolio manager of the (OPENX) Openfund and the Metamarkets IPO & New Era fund:
I think it means that tech is a game of creative destruction. The big tech names of 20 years ago are virtually unknown today, and in 20 years Microsoft and Intel will probably be unknown too.
I don't think we're seeing a rotation out of tech, but out of tech leaders whose story is exhausted. I think this just shows that
editor of the influential monthly newsletter
Gilder Technology Report
has been right all along: The center of the sphere has moved from the PC to the network. We own networkers like
. These are very interesting names.
I think today we're looking at a market of stocks -- a stock picker's market. I wouldn't have said that last year, but it's time to separate the sheep from the goats.