Best of the Week
Most Popular
1.London House Prices Bubble, Debt Slavery, Crimea 2.0 - Russia Ukraine Annexation - Nadeem_Walayat
2. Gold And Silver – 2014 Coud Be A Yawner; Be Prepared For A Surprise - Michael_Noonan
3.Sheffield, Rotherham Roma Benefits Plague, Ch5 Documentary Gypsies on Benefits & Proud - Nadeem_Walayat
4.Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - Jim_Willie_CB
5.Don't Miss the Boat on Big Biotech Catalysts: Keith Markey - Keith Markey
6.Gold Prices 2014: Do What Goldman Does, Not What It Says - David Zeiler
7.Bitcoin Price Strong Appreciation to Be Followed by Declines? - Mike_McAra
8.Gold Preparing to Launch as U.S. Dollar Drops to Key Support - Jason_Hamlin
9.Doctor Doom on the Fiat Money Empire Coming Financial Crisis - Andrew_McKillop
10.The Real Purpose Of QE - It’s Not Employment - Darryl_R_Schoon
Last 72 Hrs
America has Become a Police State - 19th Apr 14
Elite Herd Psychology And War By Default - 19th Apr 14
E.U. Officially Adopts the Bank Depositors Bail-In - 19th Apr 14
Goldman Sachs Is Highly Motivated To Low-Ball Gold Price - 19th Apr 14
Save MtGox - Bitcoin Important Implications of Going Down - 19th Apr 14
Stock Market SPX Topping Valuations - 19th Apr 14
Tesco Profits Panic! Back to Back £5 Off £40 Shop Voucher Promotions - 18th Apr 14
The Obama Game - Is Putin Being Lured Into a Trap? - 18th Apr 14
The Growing Threat to Capitalism - 18th Apr 14
Build Biotech Wealth on Solid Platforms - 18th Apr 14
Has Solar Power Finally Arrived? - 18th Apr 14
Bank Depositor Bail-Ins and Real Assets vs Liability-Based Assets - 18th Apr 14
10 Ways to Screw up Your Retirement - 17th Apr 14
One of Harry Dent’s Three Keys to Market Prediction is Cycles - 17th Apr 14
Obamacare Proof Stocks - 17th Apr 14
Gold, Silver And The Mining Sector: Prepare For A Severe Fall - 17th Apr 14
Hidden Australian Life Sciences Bio-tech Growth Stocks - 17th Apr 14
Disrupting Big Data Status Quo - 17th Apr 14
What the Stock Market Bears Have Been Waiting for... - 17th Apr 14
Copper Is Pathological and Suffers from SAD, but It Has Value - 17th Apr 14
Old World Order New World Order, Chaos And Change - 17th Apr 14
Even The US Government Will Abandon the U.S. Dollar - 17th Apr 14
Gold - Coming Super Bubble - 17th Apr 14
Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - 16th Apr 14
High-Frequency Insider Trading - 16th Apr 14
Gold Prices 2014: Do What Goldman Does, Not What It Says - 16th Apr 14
These CEOs Will Make Investors Rich - 16th Apr 14
Climate Change, Central Banking And The Faustian Bargain - 16th Apr 14
Every Central Bank for Itself - 16th Apr 14
Social Security, U.S. Treasury Stealing Every Last Penny From Americans - 16th Apr 14
Ukraine Falling to Economic Warfare and Its Own Missteps - 16th Apr 14
Silver and Gold Miners Still Disappoint - 16th Apr 14
Silver, Gold, and What Could Go Wrong - 15th Apr 14
How I Intend to Survive the Meltdown of America - 15th Apr 14
France Wakes Up To The Multicultural Multi-Threat - 15th Apr 14
The Real Purpose Of QE - It’s Not Employment - 15th Apr 14
Peak Coal - 15th Apr 14
Flash Crash, Rigged Markets - What’s the Frequency Zenith? - 15th Apr 14
Forecasting U.S. GDP Growth: A Look at WSJ Economists’ Collective Crystal Ball - 15th Apr 14
Stock Market - Is Something Nasty About to Happen? - 15th Apr 14
How to Trade Your Way To Freedom - 15th Apr 14
Understanding (and Ignoring) the Media Bandwagon Against Gold - 15th Apr 14
When Stock Market Bubble Crashes, Take Refuge in Gold Stocks - 15th Apr 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

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