MIT professor Nicholas Negroponte has a simple solution to the global digital divide: give every child in the world a $100 laptop. He's spearheading the controversial non-profit One Laptop Per Child project, which has developed the OLPC XO-1 computer, powered by the Advanced Micro Devices (AMD) - Get Report Geode LX-700 processor.
, is countering with its own low-cost laptop, the Intel Classmate. The stakes are enormous, not just for Intel and AMD, but for the entire computer industry. Who wouldn't want a billion more customers? We at Stockpickr assembled the
portfolio to track many of the possible winners in this war.
The rhetoric is as vicious as in any real war. The OLPC project was recently the subject of a
segment. In it, Negroponte told Lesley Stahl that Intel has been "shameless" in trying to kill the project. Intel Chairman and CEO Paul Otellini countered, dismissing the idea that Negroponte can, all by himself, accomplish this Herculean task.
"It will take the whole industry to do this," he said.
AMD sides with Negroponte. In the May 25
, Michael Silverman, head of AMD Global Communications, wrote that "Intel views poor children of the world as a market opportunity." This is worse than
That's enough of the catfight. Let's look at which computer industry players will directly benefit.
care deeply who wins. The XO-1's operating system is the open-source Fedora Core with the Sugar user interface produced by Red Hat. Red Hat, a $4.5 billion company with $400 million of revenue in 2006, has made a lot of money from free, open-source software. There's no reason it can't do even better with an extra billion customers. Other companies that produce Linux versions, such as
( NOVL) and
, by creating programs that run on the XO-1, stand to benefit as well.
Microsoft isn't standing idly by. The Classmate, according to Intel's specifications, can run either Microsoft Windows XP Pro or Linux. Although that's true, it appears that the Classmate will be bundled with a special $3 version of Microsoft Windows. That's a additional $3 billion dollars of sales up for grabs for Microsoft.
Neither the XO-1 nor the Classmate is shipping, and volume contracts are not yet in place. However, some companies stand to gain no matter which side wins. Consider
. With a tight semiconductor cost situation, it's imperative that the percentage of good chips (the "yield") be as high as possible. KLAC is a top holding of
, David Tepper's $4 billion dollar hedge fund, and
And, of course, the chip manufacturers themselves would have humongous orders. The plays here are
, the largest semiconductor manufacturer in the world, with sales of $9.6 billion in 2006 (and a 3.6% yield besides), and
, which produces semiconductor fabrication machines. TSM is a large holding of Mark Headley's
fund, a five-star Morningstar fund. The
iShares Taiwan ETF
has a large position in TSM, and Paul Tudor Jones II, manager of the $15.4 billion
, recently added Novellus.
What about the "shameless" charge that Negroponte leveled at Intel? There have been charges in the blogosphere that Intel is price-dumping to kill OLPC. According to Intel, the Classmate will retail for under $200.
However, according to
, who has used both the OLPC and the Classmate, the Classmate's production cost is $400. Could Intel take a $200 loss each on a billion computers? Is a soon-to-be-obsolete PC with an x86 processor and a 2-hour battery life what the world's poorest children need? What's Intel's purpose?
The reason: to preserve whatever pricing power is left for PC manufacturers like
, as well as companies that make monitors, disk drives and printers for the PC, by killing OLPC. If a fully featured $100 laptop, with wireless access, email and word processing, works for a child in Nigeria, it could be good enough for many of us as well. That would also mean shrinking profits at companies like
. These would be stocks to short if OLPC wins.
Between them, Intel and AMD have almost 100% of the PC and server markets, with Intel controlling 75% to 80%, and AMD at 20% to 25%. To gain a percentage point or two against its rival, each has been cutting prices and, unfortunately for them, profits. In 2004 and 2005, AMD was winning this sumo fight, which was good for the consumer, but bad for Intel and AMD. In 2006, Intel's annual profit declined 42% and AMD lost $166 million.
Another front of the Intel-AMD global war comes in the volume shipments of Intel's Core 2 Duo and Quad processors since late 2006. This is not just a price war anymore. These chips, sometimes referred to as "multi-core processors", are actually multiple processors in one chip. For applications that need extra horsepower, such as graphic-intensive games, CAD/CAM systems or enterprise-class servers, the ability to have two (Duo) or even four (Quad) processors, hardwired on one chip, sharing the workload, is a quantum leap in computing power.
In this game of leapfrog, Intel introduces a new chip class at a high price, then AMD comes up with a more powerful chip in the same family at a lower price, and the price war begins. In this case, AMD's Barcelona quad core processor is slated to hit the market in the latter half of this year, to compete with Intel.
Until AMD ships Barcelona, it will lag Intel. In March, AMD warned that it would miss its first-quarter revenue guidance of $1.6 billion to $1.7 billion, and the company warned again in April.
Intel's first-quarter earnings were better, with sales of $8.85 billion and income of $1.61 billion, and its EPS of 27 cents per share beating the analysts' mean estimate by a nickel. Plus, the company reported 50% gross margin. But this quarter, Intel needs to move product.
The company, to prevent inventory buildup, will
of its Core 2 Quad processor by 50% on July 22, according to an Intel document circulated to clients. On June 6, AMD stock fell because of reports from the Computex 2007 show in Taiwan that Barcelona would be delayed to September or October, instead of shipping in June or July.
In a May 21
article, Eric Savitz quotes JPMorgan analyst Christopher Danely saying if Intel competes effectively against Barcelona, gross margins could go back to historic highs (in the low 60% range), and the stock could move into the high $20s, from its close of $22.65 on June 13. If Barcelona wins, Intel's margins will stay in the low 50% range and the stock stalls or maybe crawls to $25.
In the R&D theater of the war, Intel is forging ahead in cutting-edge research as well, notably the Penryn family of 45-nanometer chips, the next step up from the current standard of 65-nanometer chips. What this means is you can fit more transistors -- up to 1 billion of them -- on one chip, with less heat generation and with the SSE4 instruction set.
Expect to see even smaller, more powerful cell phones, PDAs and notebook computers with this new technology. This is another area where AMD will need to play catch-up. The company is slated to ship its own 45-nanometer chip in 2008.
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