August 25, 2003
Chipocalypse Feelings?
Intel trades at over 30 times free cash flow, more than 50 times earnings, and since June 2002 the company has posted negative return on equity (ended June 2003)…Why are investor’s prepared to pay more than double what INTC shares were trading at in October 2002 today?
With a dividend yield of 0.29% the argument that Bush’s dividend scheme is boosting INTC shares quickly goes out the window. Furthermore, with Intel trading at more than 30 times manipulated 2004 earnings estimates the premise that shares are undervalued (given that the S&P 500 historically averages a trailing multiple of 16) becomes equally absurd. Thus, the reason Intel shares are back in vogue must have something to do with the fact that investor’s are increasing their tolerance for holding (tech) stocks?
Incidentally, when someone argues that $7.3 - $7.8 billion in revenues (3Q03 estimate) and 56% gross margins is cause for celebration, I can’t help but remember when $8.3 billion in revenues and 65% gross margins were the numbers being thrown around (Intel’s 3Q00 estimates made in June 2000). While things may be improving, it is obvious that Intel is not likely to achieve sustainable 1990s type growth in the future. Why then does Intel deserve to trade at mania type multiples?
Watching Momentum
As should be apparent to anyone watching the markets right now, stock market ‘gains’ do not occur when corporate fundamentals and/or market valuations are attractive, but when the case for upside stock market momentum is attractive. To be sure, stock prices themselves – as opposed to free cash flow, P/E multiples, ROE, etc – have become the only indicators worthy of mention; the only technicals that can be pointed at to justify market movements.
Merrill’s Bernstein astutely summed up this phenomenon in a recent FT article:
“Investors are afraid of missing the boat. Portfolio managers are under such intense pressure to perform minute-by-minute and fundamentals don't change quickly enough to keep up. They need higher frequency data and higher frequency data are called stock prices. They follow technicals at the expense of fundamentals.”
Trade is usually listless leading into Labor Day weekend. However, since bonds have taken a beating since mid-June, and the statistics continue to suggest that the economy is strengthening, the action in the markets later this week could be a preview of what to expect next week. Does the recovery story continue to compel capital to hold onto equities or does an initial trickle out of equities turn into an outpouring once September begins? A lot may depend on how companies like Intel perform in the coming days.
In short, Intel is a great company that owns a leadership position in techland, and arguing that its shares are prone to decline following the company’s optimistic outlook last week may be wishful thinking. However, it is worth remembering that Intel is also a stock that trades its entire float every 101 days, a stock that is owned by more than 4,000 institutions, and a stock that no insider dares ever purchase. As such, and although 30 times free cash flow is a rich premium to pay for any stock, how the momentum players feel about stocks in general will determine how the Intel type darlings fair in September.
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