Chips and Dips

Everyone knows that the stock market places too much emphasis on the short term and that investors’ time horizons don’t extend beyond next week. But the picture’s a little more complicated than that, as the market’s treatment of Intel yesterday demonstrates. Friday evening, Intel announced that it will be delaying the release of its next-generation chip, the 64-bit Merced microprocessor, which is going to represent a qualitative–as opposed to just incremental–improvement on its current line of Pentium processors. In the crudest terms, Merced should make personal computers into the equivalent of high-end workstations (which in some respects they already are, but now they really will be), and Intel is counting on the chip to distance itself once again from the pesky low-end competitors that have been eroding its profit margins all year.

Delaying the release of Merced–which Intel is doing for quality-control reasons–is, therefore, bad news, which is why Intel’s stock fell almost four points on Monday. But what’s interesting about the market’s reaction is that Intel is pushing Merced’s release back from mid-1999 until sometime in the year 2000. In other words, even before the delay, Merced wasn’t scheduled to appear for another 12 months. And whatever impact Friday’s decision has on Intel’s bottom line won’t be felt until late next year, at the very earliest. In knocking down Intel’s stock, then, investors were actually taking a long-term perspective on the stock, thinking about where the company was going to be not next week, but next year.

Of course, this doesn’t really explain why Intel’s news sent the entire technology sector into a tailspin, but the truth is that, as I suggested last week about Disney, everyone is so justifiably skittish about these sky-high valuations that any excuse for profit-taking (the new synonym for panicked selling) becomes a good one. And the fact that the Russian ruble appears about ready to disappear, coupled with the continued fallout from Asia, has created a climate in which bad news for one company becomes bad news for all. On the other hand, one of the few tech stocks to rise on Monday was Sun Microsystems, which makes the high-end workstations that Merced is expected to make irrelevant. So investors were not simply running for the door.

What Intel’s recent stock-market woes–it’s now trading more than 30 percent below its peak–also demonstrate is how the market’s relative dismissal of the value of dividends has made the actual profitability of companies less important to investors than the rate of profit growth. When investors knew that they would get 4 percent to 5 percent of profits annually, the size of those profits was more important. But in recent years, more and more companies have done away with dividends entirely (Microsoft pays no dividend, and Intel’s is minuscule). As a result, the only access to a company’s stream of profits that an investor has is through the stock market, which means that she’s at the mercy of whatever standard of valuation the market has adopted at a particular time.

Even though Intel was the third most profitable company in America last year, earning $7 billion, and even though it had the second-highest profit margin and the second-highest return on assets, its stock barely budged, precisely because Intel shareholders don’t get any of that money. What Intel has done, or even what it is doing, ends up being less important than what it will do. Which is why the Merced news sent the stock spiraling down.