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Q&A: Scovel on Intel
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July 19, 2000: 2:32 p.m. ET
Needham & Co. analyst talks about the chip company's latest quarterly results
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NEW YORK (CNNfn) - Intel Corp., the world's largest supplier of semiconductors, reported strong second-quarter financial results in what historically has been a weak quarter for the company. Is this a signal that the chip and personal computer industries may be stronger than some had expected?
CNNfn.com asked Needham & Co. semiconductor analyst Dan Scovel what his thoughts were about Intel's (INTC: Research, Estimates) most recent quarter, and how much light it sheds on the bigger picture.
CNNfn: Was Intel's quarter in line with your expectations?
Scovel: Yes, very much so. We have grown to expect Intel to meet or slightly exceed expectations by a couple of pennies, and this is exactly what it delivered 2Q.
CNNfn: Did you see particular areas of strength or weaknesses?
Scovel: The way Intel delivered its financial numbers for 2Q was very unique in that it appeared to come primarily from sequential revenue growth of 4 percent and increasing microprocessor shipments during the weakest season of the year for PC markets. We consider this highly unusual. We are more used to seeing the company meet or beat expectations through higher-than-expected gross margins or interest/other items, or lower-than-expected operating expenses on the income statement. These intermediate income statement items were generally well in-line with our expectations.
CNNfn: Intel frequently is looked at as a barometer for the semiconductor and PC industries. What kind of signals did the latest results send in that respect?
Scovel: We see three messages coming out of this 2Q earnings announcement. First, a reminder that Intel is very strong company and is capable of supporting investor expectations from many different avenues. Second, the current cyclical upturn of the semiconductor industry is strong enough to overcome typical seasonal slowness. And third, confirmation that the PC industry is doing well, and somewhat better than originally expected earlier this year.
 CNNfn: There have been some concerns in the market about a looming oversupply of some semiconductors because of the sharp rise in capital spending. How do you see the supply-demand picture shaping up?
Scovel: At the current time, we believe supply has considerable room before it catches up with demand. Clearly, capital spending is a leading indicator for capacity enhancements, and we view over-supply as the primary factor triggering cyclical downturns in the semiconductor industry. At this point, we do not expect an industry downturn prior to 2002. However, forecasting such turns have proven to be very, very difficult in the past. Rules of thumb include: It always happens when you least expect it; and It's always worse than anticipated. We consider paranoia a healthy and appropriate quality to embrace when dealing with this dynamic sector.
CNNfn: What is your current rating on Intel?
Scovel: We currently rate Intel as "hold." We believe it can grow revenue at least 20 percent due to its exposure to server, flash memory and communications markets, despite our concerns that its PC business may stagnate due to broader market and competitive price pressure. In addition, we believe its current fundamental share-price valuation is consistent with its peers in the semiconductor industry and other, very large market-capitalized, electronics-oriented equities.
CNNfn: Which other chip stocks are among your top picks?
Scovel: We currently rate a number of chip stocks as Buys, including: Advanced Micro Devices (AMD: Research, Estimates), Micron Technology (MU: Research, Estimates), Cypress (CY: Research, Estimates) and Alliance Semiconductor (ALSC: Research, Estimates).
CNNfn: What is your long-term outlook for the semiconductor industry?
Scovel: We are quite bullish on the long-term outlook for the chip industry. We view it as a highly cyclical space within a broader environment of long-term, annual secular growth in the 17 percent-to-20 percent range. We believe the semiconductor industry will continue to be the primary driver behind all electronics and information technology for many years to come.
* Disclaimer 
-- compiled by Staff Writer Richard Richtmyer
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