Wintel's Future

During the recent market downturn both Intel and Microsoft have traded down to less than ten times earnings net of cash. While one can point to companies with lower multiples, they are usually companies that are more capital intensive and do not throw off the free cash flow of a Microsoft or Intel.

Normally these stocks would be no brainers at these valuation levels but there are secular issues with both stocks. For many years people mused that the Microsoft stronghold could be broken by Linux but Linux never really took off with the mainstream. Now we are seeing tablets with iPhone and Android based operating systems and consumers are willing to buy it. This is the first real threat to the Microsoft monopoly.

For a while Intel did not care who won Apple or Microsoft as they were supplying chips for both companies. Now as tablets take off companies have other options. Apple has created their own chip for the iPad. Qualcomm and Broadcom both have alternatives for these lighter computers.

Intel and Microsoft's stocks are certainly not pricing in the type of monopoly that they have held in the past. My guess is that both stocks are buyable at current valuation levels but they are not slam dunks as there are real threats to both parties long standing monopolies.

1 comment:

Anonymous said...

Tech always evolves. Both Microsoft and Intel have plenty of smart people on board and are capable of reinventing themselves, just like IBM has done many times in the past. I'm not too worried about any of these companies going bust in my lifetime. The real danger is that the reinvention is done at the expense of the shareholder, so that long-term ROE is negative. Ask yourself how shareholder-friendly mgmt is? Will they give cash back to shareholders through buybacks and dividends, or do they insist on plowing everything into the reinvention process?

P.S. I dumped what I bought on Friday, at a small profit. I'm convinced this market is heading down to 900 on the SP500. This is a sucker's rally for sure.