Comments on: Intel : The power of a monopoly http://www.blogvesting.com/2007/08/11/intel-the-power-of-a-monopoly/ Articles on value investing Sat, 28 Mar 2009 00:11:29 +0000 http://wordpress.org/?v=2.9.1 hourly 1 By: valuegeek http://www.blogvesting.com/2007/08/11/intel-the-power-of-a-monopoly/comment-page-1/#comment-18 valuegeek Tue, 14 Aug 2007 20:25:38 +0000 http://blogvesting.com/2007/intel-the-power-of-a-monopoly/#comment-18 I agree that AMD has a lower COGS than Intel. However, when I mentioned "unit costs", I was including the cost of research, as well as the cost of actually building the fab plant. These costs wildly outstrip the actual wafer costs, which is basically highly purified sand. Even if you strip out the cost of research, in the semiconductor industry, the company that can maintain the highest utilization ratio of its fab plants will end up with the lowest cost chip. These indirect costs are not neatly reflected in the income statements, but make no mistake, they define the cost structure of the semiconductor industry. This is why outsourcing chip manufacture is a possible strategy for AMD. If you cannot maintain close to 100% utilization of your fab plant, you are going to lose money hand over fist until you sell your fab plant. I also agree that most retailers will continue to sell AMD chips, just to keep Intel in line. However, as long as the most advanced CPUs, the ones that has the highest profit margins, are completely dominated by Intel, than I think higher profit margins for Intel is not unreasonable. I agree that AMD has a lower COGS than Intel. However, when I mentioned “unit costs”, I was including the cost of research, as well as the cost of actually building the fab plant. These costs wildly outstrip the actual wafer costs, which is basically highly purified sand. Even if you strip out the cost of research, in the semiconductor industry, the company that can maintain the highest utilization ratio of its fab plants will end up with the lowest cost chip. These indirect costs are not neatly reflected in the income statements, but make no mistake, they define the cost structure of the semiconductor industry. This is why outsourcing chip manufacture is a possible strategy for AMD. If you cannot maintain close to 100% utilization of your fab plant, you are going to lose money hand over fist until you sell your fab plant.

I also agree that most retailers will continue to sell AMD chips, just to keep Intel in line. However, as long as the most advanced CPUs, the ones that has the highest profit margins, are completely dominated by Intel, than I think higher profit margins for Intel is not unreasonable.

]]> By: balle http://www.blogvesting.com/2007/08/11/intel-the-power-of-a-monopoly/comment-page-1/#comment-19 balle Mon, 13 Aug 2007 20:22:24 +0000 http://blogvesting.com/2007/intel-the-power-of-a-monopoly/#comment-19 Even though I agree with the broad assertion that INTC is a good buy at these level, I completely dis-agree with the basis for the reasoning. Actually, the reasoning presented is shallow and made on false statement "The basic structural fact is that AMD has greater unit costs than Intel, and therefore cannot possibly compete on price." This statement is wrong. Actually, AMD has always done better on COGS than INTC. They have always had a smaller die size which basically gives you more wafers per die and hence a lower cost die. Because of the lower COGS, they have historically sold prices CPU and are still in business. "The price war has forced Intel’s gross margins from the height of 59% in 2005 down to 47% in the latest quarter." Lower margins is new reality for INTC and Wall Street will have to adjust to that. The higher INTC margins came from being a monopoply where OEMs had little to no choice in terms of CPU vendor. That has changed. They WILL SELL AMD even if AMD parts are not performing as well, just keep INTC in line. Even though I agree with the broad assertion that INTC is a good buy at these level, I completely dis-agree with the basis for the reasoning. Actually, the reasoning presented is shallow and made on false statement

“The basic structural fact is that AMD has greater unit costs than Intel, and therefore cannot possibly compete on price.”

This statement is wrong. Actually, AMD has always done better on COGS than INTC. They have always had a smaller die size which basically gives you more wafers per die and hence a lower cost die. Because of the lower COGS, they have historically sold prices CPU and are still in business.

“The price war has forced Intel’s gross margins from the height of 59% in 2005 down to 47% in the latest quarter.”

Lower margins is new reality for INTC and Wall Street will have to adjust to that. The higher INTC margins came from being a monopoply where OEMs had little to no choice in terms of CPU vendor. That has changed. They WILL SELL AMD even if AMD parts are not performing as well, just keep INTC in line.

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