Best of the Week
Most Popular
1.UK General Election BBC Exit Polls Forecast Accuracy - Nadeem_Walayat
2.UK General Election 2017 Seats Final Forecast, Labour, Conservative Lib-Dem, SNP - Nadeem_Walayat
3.UK General Election 2017 Forecast: Conservative 358, Labour 212 Seats - Nadeem_Walayat
4.Theresa May to Resign, Fatal Error Was to Believe Worthless Opinion Polls! - Nadeem_Walayat
5.UK House Prices Forecast General Election 2017 Conservative Seats Result - Nadeem_Walayat
6.The Stock Market Crash of 2017 That Never Was But Could it Still Come to Pass? - Sol_Palha
7.[TRADE ALERT] Write This Gold Stock Ticker Down Now - WallStreetNation
8.UK General Election Results Map 2017 vs 2015 vs Opinion Polls - Nadeem_Walayat
9.Orphaned Poisoned Waters,Severe Chronic Water Shortage Imminent - Richard_Mills
10.How The Smart Money Is Playing The Lithium Boom - OilPrice_Com
Last 7 days
Sheffield Broomhall Hanover Flats Tower Block Cladding Could Take Months to Remove! - 28th Jun 17
Shrinkflation In UK – Real Inflation Much Higher Than Reported - 28th Jun 17
Are the UK Elections a Forgone Conclusion? - 28th Jun 17
Is the Tech Stock Market Bloodbath is Finally Here? - 28th Jun 17
Crude Oil Sinks 20%: Why "Oversupply" Isn't the Half of It - 28th Jun 17
Important Money Management Tips For Teenagers - 28th Jun 17
The Coming Battery Bonanza - 28th Jun 17
Overlooked Stock Investments To Keep An Eye On in 2017 - 27th Jun 17
The Federal Reserve And Drug Addiction – A Prediction - 27th Jun 17
Charts Show Why Emerging Markets Will Be an Essential Part of Your Portfolio Going Forward - 27th Jun 17
Former Lehman Brothers Trader: I Bet My Reputation That Stocks Bubble Will Pop In A Year - 27th Jun 17
US Bonds and Related Market Indicators - 27th Jun 17
Stocks At Record Highs: Market Sentiment Still Bullish - 27th Jun 17
Stock Market Running Out of Steam - 27th Jun 17
Gold Back With A Vengeance As Bitcoin Bubble Bursts - 26th Jun 17
Crude Oil Trade & Nasdaq QQQ Update - 26th Jun 17
Gold and Silver Ongoing Consolidation May End Soon - 25th Jun 17
Dollar May Become “Local Currency of the U.S.” Only - 25th Jun 17
Sheffield Great Flood of 2007, 10 Years On - Unique Timeline of What Happened - 24th Jun 17
US Stock Market Correction Could be Underway - 24th Jun 17
Proof That This Economic Recovery Narrative is False - 24th Jun 17
Best Cash ISA for Soaring Inflation, Kent Reliance Illustrates the Great ISA Rip Off - 24th Jun 17
Gold Summer Doldrums - 23rd Jun 17
Hedgers Net Short the Euro, US Market Rotates; 2 Horsemen Set to Ride? - 23rd Jun 17
Nether Edge By Election Result: Labour Win Sheffield City Council Seat by 132 Votes - 23rd Jun 17
Grenfell Fire: 600 of 4000 Tower Blocks Ticking Time Bomb Death Traps! - 22nd Jun 17
Car Sales About To Go Over The Cliff - 22nd Jun 17
LOG 0.786 support in CRUDE OIL and COCOA - 22nd Jun 17
More Stock Market Fluctuations Along New Record Highs - 22nd Jun 17
Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - 22nd Jun 17
Green Party Could Control Sheffield City Council Balance of Power Local Election 2018 - 22nd Jun 17
Ratio Combo Charts : Hidden Clues to the Gold Market Puzzle - 22nd Jun 17
Steem Hard Forks & Now People Are Making Even More Money On Blockchain Steemit - 22nd Jun 17
4 Steps for Comparing Binary Options Providers - 22nd Jun 17
Nether Edge & Sharrow By-Election, Will Labour Lose Safe Council Seat, Sheffield? - 21st Jun 17
Stock Market SPX Making New Lows - 21st Jun 17
Your Future Wealth Depends on what You Decide to Keep and Invest in Now - 21st Jun 17
Either Bitcoin Will Fail OR Bitcoin Is A Government Invention Meant To Enslave... - 21st Jun 17
Strength in Gold and Silver Mining Stocks and Its Implications - 21st Jun 17
Inflation is No Longer in Stealth Mode - 21st Jun 17
CRUDE OIL UPDATE- “0.30 risk is cheap for changing implication!” - 20th Jun 17
Crude Oil Verifies Price Breakdown – Or Is It Something More? - 20th Jun 17
Trump Backs ISIS As He Pushes US Onto Brink of World War III With Russia - 20th Jun 17
Most Popular Auto Trading Tools for trading with Stock Markets - 20th Jun 17
GDXJ Gold Stocks Massacre: The Aftermath - 20th Jun 17
Why Walkers Crisps Pay Packet Promotion is RUBBISH! - 20th Jun 17

Market Oracle FREE Newsletter

The MRI 3D Report

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

© 2005-2017 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

Catching a Falling Financial Knife