We recently upgraded Intel, as customer-level processor inventories have gone from bloated a quarter ago to normal, and distributor sales (a leading indicator) and multinational orders have picked up in March and early April. From a product perspective, the Pentium 4 processor ramp is progressing as the fastest product ramp in the history of the company as customers are trading "up" to faster-speed processors, a positive for average selling prices. On the manufacturing front, Intel's 0.13-micron tech-nology transition is on track and yielding quite well.
Despite all the concerns, we view Intel's recent (and upcoming) price moves as classic Intel. The company competes by accelerating the product cycle and introducing faster processors at mainstream price points. Thus, a rapid volume ramp of the new Pentium 4 processor would likely entail the obsolescence of low-end (lower-performing and lower-priced) Pentium III processors, while "re-pricing" all remaining P4 and P III offerings.
The successful execution of this model would mean that desktop- blended ASPs for Intel processors remain flattish while placing pressure on the competition to meet the price points set by Intel. Thus, Intel's current pricing action is not to necessarily spur near-term overall demand, which is weak regardless; it is to position the P4 product line to become the mainstream processor by year's end.
There has been a critical issue regarding P4 yields. The only way Intel can deliver on its goal
of making the P4 mainstream by the second half of this year is by executing on manufacturing yields. Company management has indicated P4 yields are robust at this stage of the production ramp, which supports Intel's aggressive pricing stance of this high-end product.
Another important step in delivering the P4 to the mainstream is the infrastructure issue: mainstream PCs need mainstream DRAM support. In other words, plain-vanilla SDRAM and DDR (for cost-effective high-performance systems). Intel's update on the Brookdale core-logic chipset suggests that P4 systems based on SDRAM and even potentially DDR are well within reach this year. In 2002, Intel plans to ramp its 0.13-micron process for desktop processors after ramping its mobile processors with 0.13 micron in the summer, with positive implications for performance and margins for the P4 in 2002 and 2003.
At this point in the cycle, we believe that the semiconductor PC pure-plays offer the best overall near-term fundamental outlook. That's why we recommend owning Intel.