Monday, January 31, 2011

What I learned from my Son told me to sell Intel (INTC)

Like many parents, I woke up extremely early the day after Thanksgiving to go shopping for deals for my kids. I heard Toys R Us was just nuts (thankfully I didn't go there). I had my sights set larger...a laptop. I figured that Best Buy was going to give me my "best buy"...and that was true...only the people at Best Buy had been there from the night before (who sleeps out in the cold on Thanksgiving night to save a hundred bucks?). I wasn't about to wait in line only to find out that they ran out of laptops before I got to the door.

So, I headed over to HHGregg, a little known competitor that I figured would have some similar deals. I had no trouble getting into the top 50 in line and the store would be open in an hour (unlike Best Buy which wouldn't open for more than 2 hours). I didn't even know what they had at the store...I was just hoping.

When I finally got a circular, I saw that the "deal" at HHGregg was a netbook...not a notebook for $199. Why not I thought? My son is small, maybe he'd like having a computer that was "his size" so I decided not to "waste" my lack of sleep and get the netbook computer and an internet connected Blu Ray player from LG.

I was excited to give my 5 year old his first computer. He uses my wife's all the time and she was anxious to get hers back so that she could do what she needed to during the day instead of waiting until he was asleep. Finally Christmas came and we gave him the netbook. He was very excited to have his own computer...until he used it.

Most websites that are visited by little people offer free games via the cloud on websites like,, This means that parents don't have to buy games (that they'll inevitably get bored with and never play again). It dramatically lowers the cost of giving a computer to a child (since the only cost is the machine they'll use as the internet connection is being paid for by the adults). Well, websites are not built for netbooks. Often the content on the screen simply can't be seen on that little tiny 10" screen. The "web" can't see how big your screen is. Next, this particular machine thought it would be cute to make the up/down keys toggle between page up & up. the middle of a game, pressing page up on a web-based game results in moving the whole screen up & you dieing. I don't know what other people use their netbooks for...but they are terrible. I would have thought these little computers could have been designed by use by smaller people (children).

Even with an adult using the computer, who may not be prone to playing games on the cloud, 10" screen is just too small. Heck, a notebook computer with a 15" monitor is small...but one can work with it. A 10" screen is 50% smaller than that! If you were doing text only on social websites (and maybe news), without any video...maybe...maybe. But tablets offer that and much more with a device that is frankly more powerful (especially if we're talking the iPad). I just couldn't see continuing to own this poorly designed device. I took it back (along with the Blu Ray player, that I found at Walmart* for about $30 less).

When I got back home, I sold all our Intel stock with it. Intel made an early bet on the adoption of the netbook and many of the devices contained the Atom chip. It has big time market-share in the netbook space. Everyone asked the question about cannibalization of netbooks by tablets when Apple released the iPad (again it was first to define a category). Intel largely ignored the question and said they believed the two could exist together.

I'm here to tell you that they are wrong. I almost didn't write this article, until I saw Intel's blunder this morning regarding the Cougar Point Chipset in which they basically have to recall all the devices shipped from January 9th and stop shipping devices with the chip since the chip leads to progressively poorer performance over time. The issues surrounding the Cougar Point Chip sound a whole lot like the leads to progressively poorer performance over time.

You can buy INTC (that's Intel stock ticker symbol) if you want something that'll act better than a bond since inflation will be coming eventually. The stock pays a 3.5% dividend (better than nearly all CDs and many bonds) and they have tons of cash flow, clean balance sheet, and attractive valuation. But, ultimately, their valuation is attractive and the multiple is low because growth doesn't exist anymore. Intel made a bad bet on the rise of the netbook (a device I think will go the way of the HDDVD that lost to the Blu Ray format). With netbooks only $140 or so less than a notebook...most will do what I do and spring for the full size computer and save themselves the headache of the terrible design of the netbook.

If people want a smaller device, they'll buy a tablet pc (probably from Apple). Instead of betting on the future of looks like Intel should have just called up Apple and asked them if they could make them a chip for whatever device they saw in the future. Instead, Intel tried to get "out front" (netbooks beat tablets to market) and ended up getting whooped by players like NVDA, CRUS, ARMH, and others who made the chips that went into Apple's now industry leading, netbook crushing, iPad. So sell your Intel and just go buy Apple. There are still plenty of haters to convert that will have to buy Apple & take it higher. Besides, Apple only has something like 14% of the personal computer market and probably less of the smartphone market with superior products. Who cares what chips they use inside...Apple is the real investment.

Intel may finally get its act together and go higher…who knows, anything is possible. But there is an opportunity cost to owning Intel…you might not be able to own Apple at the same time. For me, that opportunity cost it too high. I’d rather own no Intel and whatever size position of Apple that is appropriate for your portfolio (not more than 10% of the total holdings). My son is now much happier with his new notebook computer and I'm much happier with our bigger Apple position in the portfolio (we bought more on the big dip on the Jobs news).

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