Best of the Week
Most Popular
1.U.S. Inner City Turmoil and Other Crises: Ron Pauls Predictions for 2015 - Dr_Ron_Paul
2. What’s In Store For Gold Price in 2015? - Ben Kramer-Miller
3.Crude Oil Price Ten Year Forecast to 2025: Importers Set to Receive a $600 Billion Refund - Andrew_Butter
4.Je ne suis pas Charlie - I am not Charlie - Nadeem_Walayat
5.The New Normal for Oil? - Marin_Katusa
6.Will Collapse in Oil Price Cause a Stock Market Crash? - OilPrice.com
7.UK CPI Inflation Smoke and Mirrors Deflation Warning, Inflation Mega-trend is Exponential - Nadeem_Walayat
8.Winter Storms Snow and Wind Tree Damage Dangers, DIY Pruning - Nadeem_Walayat
9.Oil Price Crash and SNP Independent Scotland Economic Collapse Bankruptcy - Nadeem_Walayat
10.U.S. Housing Market Bubble 2.0 Meet the Pin - James_Quinn
Last 5 days
Kaminak Yukon Gold - 30th Jan 15
U.S. Asset Price Deflation Coming Up? Food Prices Drop? CPI Negative? Credit Deflation? - 30th Jan 15
An Often Overlooked Predator: State Governments and Income Taxes - 30th Jan 15
Bullard Says Rates at Zero Interest Rates Not Right for U.S. Economy - 30th Jan 15
Why the European Central Bank's Massive Economic Experiment Will Fail - 30th Jan 15
Gold Price Short-Term Bottom Due, Higher into February - 30th Jan 15
Silver and Other Precious Metals To Manipulate - 30th Jan 15
Socialism Is Like a Nude Beach - Sounds Like a Great Idea Until You Get There - 30th Jan 15
To Create Unlimited Market Liquidity or Not; That Is the Question - 30th Jan 15
Seen the Energy Downturn Movie Before, and Not Worried - 30th Jan 15
It’s Not Time to Sell Everything – Yet - 30th Jan 15
13 Investment Themes for 2015 - 29th Jan 15
The Raging Currency Wars Across Europe - 29th Jan 15
The End of Currency 'Safe-Havens' - 29th Jan 15
Ron Paul on U.S. Fed, Central Bankers Monetary Psychopaths - 29th Jan 15
Why Microsoft Stock Will Provide Major Investing Returns - 29th Jan 15
Exploring the Clash Within Civilizations - Mind the Gap - 29th Jan 15
Saudi Arabia Changes Kings, But Not its Oil Policy - 29th Jan 15
Crude Oil Price Bulls vs. Resistance Zone - 28th Jan 15
Acceleration Of Events With Rising Chaos – US Dollar Death Foretold - 28th Jan 15
The Fed and ECB Take the West back to when the Rich Owned Everything - 28th Jan 15
Washington's War on Russia - 28th Jan 15
Cyber War Poses Risks To Banks and Deposits - 28th Jan 15
Lies And Deception In Ukraine's Energy Sector - 28th Jan 15
EUR, AUD, GBP USD – Invalidation of Breakdown - 28th Jan 15
“Backup-Camera Envy” Is Driving This Unstoppaple Investment Trend - 28th Jan 15
The Great "inflated" Expectations for Gold, Oil, Commodities -- and Now Stocks - 28th Jan 15
How to Find the Best Offshore Banks - 28th Jan 15
There’s More to the Gold Price Rally Than European Market Fears - 28th Jan 15
Bitcoin Price Tense Days Ahead - 27th Jan 15
The Most Overlooked “Buy” Signal in the Stock Market - 27th Jan 15
Gold's Time Has Come - 27th Jan 15
France America And Religious Terror War - 27th Jan 15
The New Drivers of Europe's Geopolitics - 27th Jan 15
Gold And Silver - Around The FX World In Charts - 27th Jan 15
It’s Not The Greeks Who Failed, It’s The EU - 27th Jan 15
Gold and Silver Stocks Investing Basics - 27th Jan 15
Stock Market Test of Strength - 26th Jan 15
Is the Gold Price Rally Over? - 26th Jan 15
ECB QE Action - Canary’s Alive & Well - 26th Jan 15
Possible Stock Market Pop-n-drop in Store For SPX - 26th Jan 15
Risk of New Debt Crisis After Syriza Victory In Greece - 26th Jan 15
How Eurozone QE Works: A Guide to Draghi's News - 26th Jan 15
Comprehensive Silver Price Chart Analysis - 26th Jan 15
Stock Market More Retracement Expected - 26th Jan 15
Decoding the Gold COTs: Myth vs Reality - 26th Jan 15
Greece Votes for Syriza Hyperinflation - Threatening Euro-zone Collapse or Perpetual Free Lunch - 26th Jan 15
Draghi's "No-growth" QE Money for Stocks, Zilch for the Economy - 25th Jan 15
Unjust and Undeclared Wars - 25th Jan 15
The European Central Bank Commits Monetary Suicide - 25th Jan 15
Stock Market ECB EQE week - 25th Jan 15
Gold And Silver Timing Is Most Important Element - 25th Jan 15
The Best Way to Invest in the Next Alibaba Internet Stock IPO - 25th Jan 15
The Outpatient Surgery Business Rains Cash into Healthcare Stocks - 25th Jan 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Learn to Trade

Why I'd Buy Intel Over Apple

Companies / Tech Stocks Feb 20, 2013 - 06:38 PM GMT

By: DailyWealth

Companies

Porter Stansberry writes: There aren't very many genuine technology companies.

Instead, almost all of the companies people call "tech stocks" are really companies that use technologies to make or to sell their products. They have no real technological advantage whatsoever. As a result, it is difficult for them to achieve the kind of scalability (expanding profit margins) that is the hallmark of great tech companies.


To me, the definition of a tech stock is based on the nature of the moat that surrounds its business and protects it from competition.

In short, is the company's competitive advantage based mainly on the technological superiority of its products? Are these technologies proprietary? And most important, are these products tremendously scalable? Will the gross profit margins of the business grow as volume ramps up?

Consider semiconductor giant Intel (NASDAQ: INTC), for example. Intel takes sand (silicon) and applies decades of research and engineering to turn it into the heart of the modern world – computer chips. The moat around its business is both high-tech expertise and intellectual property. It is difficult (impossible, really) to compete against Intel in the microprocessor market, where it has tremendous scale.

That's because most of Intel's costs are fixed. It takes a lot of capital to build fabs (the plants where Intel's chips are made). It takes a lot of capital spent on research and development (R&D) to produce faster and faster chips. And it takes a lot of money to hire and retain the brilliant engineers to design the chips and the patent attorneys to protect the chips. But it doesn't cost much at all to make each additional chip. This lack of marginal costs (and the large size of the fixed costs) is what makes tech stocks so interesting for investors.

From 2010 to 2012, Intel's business grew – a lot. The company sold $10 billion more in chips last year than it did in 2010. But the company's costs to make these extra chips only increased by $5 billion. Thus, the more chips Intel sells, the bigger its margins get.

This fact makes the microprocessor market a natural monopoly. As Intel gets bigger, it can afford to spend more and more on R&D... which makes its chips bigger, faster, and better than its competitors'. The R&D makes its products better in a tangible, objective way. That, in turn, allows Intel to sell more and more chips at higher and higher prices... and earn wider and wider margins.

I realize the stock market hasn't been impressed with Intel's earnings lately. I think investors are making a huge mistake.

Wall Street puts far too much emphasis on sales growth. It ignores the quality of a company's earnings and the moat around its business. Yes, on a percentage basis, Intel's growth is slowing because it is already such a big business. But consider the quality of those earnings...

Last year, Intel earned more than $20 billion in cash. With this huge profit, Intel spent more than $16 billion returning capital to its owners via cash dividends ($4 billion) and share buybacks ($12 billion). In short, shareholders at Intel kept 80% of the profits.

Please make sure you understand what this means... Intel is a $100 billion business. The current shareholder yield (cash and share buyback) is now over 16%.

Let's compare that to Wall Street's current darling, Apple (NASDAQ: AAPL).

Apple designs consumer products that use mostly other people's technology. The big difference is that Apple is also a software company. Its software is truly excellent, so we'd qualify Apple as a legitimate technology company. The question is, does it truly compete on the basis of technology... or on the basis of design and brand? I believe it mostly competes on brand and design. Thus, it will be harder (and more expensive) than most people think for Apple to remain as dominant as it is today. It will be harder for it to maintain its profit margins because it's not competing on the basis of pure technology.

Apple is a $450 billion company. It earned $50 billion in cash last year. How much of that vast richness did its shareholders get? Almost nothing – $4.5 billion in total dividends (cash and net share buybacks). The company kept more than 90% of its earnings.

I know the market (and most of you) will not agree with me, but trust me on this... Intel is a much better investment than Apple.

Intel is a real technology company. Its products are objectively better than its competitors' and that advantage is maintained via R&D spending and patents. It will be incredibly difficult for anyone to compete with Intel effectively in microprocessors. Apple, meanwhile, depends far more on design and consumer preference for its competitive advantage.

While I love Apple products today, I never used them until about 2006. The public taste is fickle. It is not hard to imagine that someone... a new Steve Jobs... could come along and put together phones and computers in a new and better way.

Apple realizes that too, which is why it wants to keep such a huge cash hoard (now more than $150 billion). Intel doesn't need a stockpile like that... so it can return more of its profits to its shareholders. I'll let you decide which company is the "real" tech stock.

Today, by the way, investors value Apple at $400 billion (enterprise value, which doesn't include the company's cash hoard). Intel is only worth about 25% of that amount ($100 billion enterprise value).

It's a safe bet that Intel's stock will outperform Apple's over the next decade.

Good investing,

Porter Stansberry

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2013 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014