Original URL: http://www.theregister.co.uk/2006/05/17/intel_pundit_forecast/

Intel will carve off flash and communications units - analysts

AMD here to stay

By Ashlee Vance

Posted in Servers, 17th May 2006 15:17 GMT

Top chip analysts expect Intel to cleave off its flash memory and communications businesses in the coming months as the company tries to cut costs and compete better against AMD. Despite these moves, however, Intel will never regain the astonishing market dominance it once enjoyed.

Intel CEO Paul Otellini warned last month that he will create a "leaner, more agile and more efficient" company by looking for underperforming business units to restructure. A group of top chip pundits believe the units in question will be Intel's flash memory group and its teams working on chips made for wireless and portable devices. These actions will improve Intel's financial structure but do little in the long-term to replenish market share lost to AMD over the past two years.

"Intel clearly is going to be in comeback mode," said Mark Edelstone, a managing director at Morgan Stanley. "If they do some aggressive restructuring, which I expect them to do, it will help a lot."

Later, Edelstone added that "Intel is a great company" but "I don't think its market share can ever go back to where it was."

Such sentiments were echoed by three other panelists at the Churchill Club's annual Semiconductor Forecast event held last night here in Silicon Valley. At this event, some of the top chip analysts give their broad views on where the industry will head over the next year and even toss out a few stock picks, which we'll bring you shortly.

Rounding out the Intel issue first, the panelists slaughtered the chip giant for failing to produce chips that could compete against AMD's Opteron and Athlon64 products.

"I don't think I have ever seen this kind of competitive dislocation," said Joe Osha, senior director at Merrill Lynch, adding that "Intel really showed up with a knife to a gun fight in servers and desktops."

All of the analysts agreed that AMD will come close to hitting its target of taking 30 per cent of the processor market in terms of units and revenue. That's up from historical levels ranging between 90-10 and 80-20 in favor of Intel.

"I think the market share will get to 30 per cent and might go beyond that," said Dan Niles, the CEO of Neuberger Berman Technology Management.

They also agreed the the flash and communications units were the most likely to go for Intel.

On the plus side for Intel, a couple of the analysts see it as having the better stock in the coming months than an "over-priced" AMD.

"Intel right now is priced like a company that will never get anything right ever again," Osha said. "I don't see how the stock doesn't outperform AMD."

Niles added, "If you believe margins have bottomed out, then you have to own the stock."

More broadly, the analysts expect Silicon Valley to continue producing solid chip companies but believe the US's influence overall will fade in the coming years.

Silicon Valley can still serve as a great "center of excellence" due to its talented people and business climate, Edelstone said.

That said, China and India are producing more engineers than the US and provide more cost-effective conditions for hiring massive amounts of staff. This will likely lead to an increase in the number of chip design companies that spring up here but then hire more of their workers in Asia - a scenario that has already started to play out.

The engineering talent is just one factor that will put more focus on China and India, according to the analysts.

"When you look at those two countries, I like to joke that four billion people can't be wrong," Niles said. "As those economies continue to outstrip the US, they are going to consume a lot of goods. I think the US consumer is tapped out."

The analysts doubted whether China could create the next Intel per se, but companies here that focus on limited use semiconductors are doomed.

"Doing an MP3 controller is probably not going to be a very defensible business when you can have someone in China do it cheaper and faster," Edelstone said.

Away from semiconductors, the professional pundits had advice for regulators as well. The panel went ballistic when the topic of Eliot Spitzer, New York's ambitious attorney general, came up. Spitzer and others have helped push through a number of reforms meant to have companies and analysts be more more transparent about their actions.

Regulations such as Sarbanes-Oxley that many people deride as a painful exercise in paper pushing sprang up in the post-Enron world.

"They have done a great job of taking productivity out of the industry, as people try to document everything," Niles said. "It's stupid."

"Investors have been very poorly served by what Spitzer brought," added Osha.

The analysts agreed that tighter regulations have resulted in an environment where many pundits are afraid to hand out strong opinions. Survivors in the profession simply straddle the middle ground while the good guys pick other careers. It's a real loss for us all.

Now, as promised, here are the stock picks. For the record, Edelstone has done the best over the past three years, while Osha has struggled. Niles sits in the middle. All of these picks are meant as 12-month bets.

Edelstone picked Atheros and Silicon Laboratories, as two companies that will come out with "hot new products" this year and do well in the market.

Osha picked Micron and ATI Technologies as strong comeback stories.

Niles picked Genesis Microchip and seemed to be half serious and half joking about buying gold as a commodity.

The pundits, you see, can never stick to the silicon. ®