Transmeta (Semiconductor) (TMTA)

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Yesterday's NYTimes article on INTC is a good read. I am getting caught up after being out of town and found this of interest. The comments of Joe Osha in the first paragraph tell us volumes about Mr Osha. Apparently Intel officials didn't tell Joe there were any problems as they lavishly entertained him.

http://www.nytimes.com/2002/06/09/business/yourmoney/09WATC.html?pagewanted=print&position=botto....

June 9, 2002

Far From Wall Street, Intel's Bad News Was No Surprise

By GRETCHEN MORGENSON

Whe Intel dropped the bomb late Thursday, ratcheting down its forecast for both sales and profit margins in the current quarter, Wall Street analysts were caught again like so many deer in the headlights. As Intel's stock plummeted on the news in after-hours trading, Joseph A. Osha, Merrill Lynch's semiconductor analyst, spoke for most of the Street when he said, "Nobody saw this coming."

In truth, somebody did see it coming; Fred Hickey, publisher of The High-Tech Strategist in Nashua, N.H., and a card-carrying nonmember of the see-no-evil brokerage firm crowd. In recent months, Mr. Hickey has repeatedly warned his subscribers that shares of Intel, the largest producer of computer chips, were headed for a fall.

For instance, back in March, Intel management predicted that gross margins in the second quarter would be 53 percent. But Mr. Hickey speculated that Intel's impressive margins were mostly a result of a buildup in inventory, not sales to end users, and that the margins were therefore unsustainable unless demand picked up. It obviously has not. And so, on June 6, Andy D. Bryant, Intel's chief financial officer, cut the anticipated profit margins to 49 percent in the second quarter, citing weakened demand for chips in Europe.

Mr. Hickey said Intel "tried to be a hero in the first quarter."
"They continued to produce at high levels, which improved their gross margins, and then talked about efficiencies and productivity when it was only an inventory buildup," he added. "Now they have to pay the piper."

While some Intel watchers may hope that the reduced forecast represents a near-term hiccup, Mr. Hickey has a different view. He thinks the days of mighty Intel's hegemony are over and that it will soon come under severe pressure from competitors —— particularly Advanced Micro Devices. Adding to his gloom is a belief that even if the economy keeps improving, technology companies will not likely participate.

"Intel is in a very difficult position, in the short-term and long term," Mr. Hickey said. "They've got to cut production, which will send costs up. That will put pressure on a stock that is still grossly overvalued even at today's lower price." Down the road, the company faces an Advanced Micro chip —— known in the industry as the Hammer —— that many industry experts consider superior to Intel's Itanium chip.

Advanced Micro plans to start shipping the chip by year-end. Software designers and box manufacturers like the chip's ability to run both high-speed and lower-speed software programs. This so-called backward capability sets it apart, giving Advanced Micro a chance to break Intel's lock on the server market.
"The Hammer is where Advanced Micro breaks into the business-computing market," Mr. Hickey said. "And Intel has had the protection of relatively high gross margins in that area."
If Advanced Micro's new chip is as good in production as it looks in tests, computer manufacturers like Dell and Hewlett-Packard may flock to it. At a minimum, having an alternative to Intel's chip will give the company's customers new leverage when negotiating on price. That would be more bad news for Intel profit margins.

Intel has dominated the semiconductor industry for what seems an eternity. Not long ago, its market value exceeded the combined total of the 16 other chip stocks in the Philadelphia Stock Exchange semiconductor index. For many investors, Intel is not just a stock; it is a religion. Even following the company's reduced sales and profit forecast, Intel carries a $147 billion market capitalization and a price-to-earnings ratio of 42. Quite a price tag, given what Intel is up against.