Tuesday, January 11, 2005

INTC keeps spending , but why?

Semi Cap companies, specifically AMAT, ASMI, WFR, NVLS, will have the largest spender continue to spend more and more to stay "competitive". INTC announced that it plans to spend $4.9 to $5.3B next year on capex and most of that on equipment. This is much better than most people were expecting, including yours truly, and will certainly light a fire under some of the semi cap names mentioned above. INTC also suggested that it expects capacity utilization to be higher next quarter which means more equipment will be needed as utilization moves higher, or so goes the argument. I still believe this is a tough industry since overall capex in 2005 spending will still be down around 10% even with the big bump by INTC as the number of companies willing and able to spend that kind of money continues to shrink.

Now here is my argument on why it makes little sense for INTC to keep spending this kind of money. I agree that it still makes tactical sense to have in-house fabs but for how long is the question. The Ghz race is over, PC cycle is gone to replacement-cycle . INTC, AMD and other major IDMs have to become consumer IC companies and consumer ICs are built cheap. Most of us consumers don't really need a 4GHz Pentium or dual core Opteron for that matter. We just need a high bandwidth connection with safe web-browser-like application (no not IE) and a 2GHz machine will be more than enough.

Semiconductors will be for consumer market where its about cost not necessarily raw-power. Selling to consumers requires marketing prowess not souped up clock speed. It's going to be about marketing the box, ask AAPL which has done a faboulous job selling the iPod to masses. Does the iPod have "PortalPlayer Inside" stickers on it? It doesn't matter to a consumer who is inside the iPod they want the iPod to be as cheap as possible and still perform well. So without the "speed-race" do INTC really need to build new cutting edge fabs? They can build them but I would worry about the ROI coming down dramatically on the fabs which will hurt the gross margin at INTC. Even with all this spending INTC revs grew 13.5% in 2004 where as the semi industry revs grew 28-30%. That is on top of the usual pricing pressure that comes naturally with playing in highly competitve consumer market. Spending large amounts does not necessarily mean revenue growth and with revenue growth slowing and spending increasing the overall equation will change and margins will shrink. But timing is everything and this will not play out in a quarter or two so until then let INTC keep pushing the Ghz and the dual-core mantra and lets hope the consumer buys it.

I would truely appreciate feedback on this from both professional and amateur investors .


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6:55 PM  
Blogger Brian Shiau said...

I definitely agree with you Slash. I actually posted about this quite recently on my blog www.ShiauStreet.com. I believe the PC industry as we used to know it is dead and computers have become commodities. The consumer does not have a need for much of what AMD and INTC are developing.

Part of the problem is that many consumers only needed such computing power to play games (I can't really think of anything else consumers do that is nearly as resource straining). But PC games are also dying as people shift towards console games. This is another reason why consumers don't need to upgrade to an Athlon 64.

The future lies in adapting chips to serving the needs of consumers. The moves to expand into cell phones and other mobile devices is a good move. Right now, chips dont need to be faster, but they need to run cooler and be more power-efficient. Companies like Intel need to adapt what they make to where the technology sector is going.

4:23 PM  

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