Can You Still Buy Intel?

Chip giant Intel (Nasdaq: INTC  ) has come a long way since the meteoric rise of computers in the '90s, which the company happily rode into the stratosphere along with the rest of the tech bubble.

Intel Corporation Stock Chart

Intel Corporation Stock Chart by YCharts

Over the past 10 years, its longtime Wintel partner in crime, Microsoft (Nasdaq: MSFT  ) , has stagnated. Unfortunately for Intel investors, the past decade has been even worse in total return.

Intel Corporation Total Return Price Chart

Intel Corporation Total Return Price Chart by YCharts

The company remains the leader in high-performance PC processors, but it faces some headwinds within the sweeping mobile revolution. Is Intel a buy, sell, or hold?

Buy:

  • Leadership: According to recent figures from market researcher IHS iSuppli, Intel's market share of global microprocessors in the third quarter stood at a dominating 83.7%, up from 80.9% last year. Smaller rival Advanced Micro Devices (NYSE: AMD  ) saw its share shrink from 11.5% to 10.2% over the same period. The explosion of tablets has been a double-edged sword. Intel's Atom lineup is tanking in lockstep with netbooks, but the mobile push has spurred demand for Intel chips in data centers powering the cloud. Intel's leadership in microprocessors should continue to expand in the near future, despite the recent guidance slash.
  • Cloud: As processing continues to migrate skyward, Intel chips continue to power the data centers in the cloud that are facilitating the mobile revolution. iSuppli predicts that consumer and enterprise spending on the cloud will jump from $23 billion in 2010 to $110 billion in 2015 -- a nearly fivefold increase in five years. ARM Holdings (Nasdaq: ARMH  ) -based chips are starting to infiltrate the enterprise-server market, but for now Intel retains its iron grip on the space.
  • Technology: As the largest chipmaker in the world, Intel leads the technological front when it comes to performance. As many chip companies are transitioning to fabless or fab-lite models, Intel retains its chip foundries. Maintaining chip plants is very capital-intensive, but that integration also allows Intel to push the limits with its technology. Intel's new Ivy Bridge chips are due out in April and use 22-nanometer architecture, making them about 30% smaller while boosting performance by 37% compared with current 32-nanometer Sandy Bridge processors. Intel far outspends rivals in R&D. Just last quarter, it spent over $2.1 billion in R&D, compared with AMD's $361 million and NVIDIA's (Nasdaq: NVDA  ) $256 million.

Sell:

  • Mobile: Years ago, when mobile meant netbooks, Intel's Atom lineup was a hit. With global netbook shipments expected to plunge 58% from 32 million in 2010 to 13.4 million in 2015, it wasn't a shocker when Intel said its third-quarter Atom revenue dropped 32% year over year. Intel missed the mobile market, and now smartphones and tablets are primarily powered by ARM chips, like those from NVIDIA and Qualcomm (Nasdaq: QCOM  ) . At long last, Intel is just now about to go mobile with its Medfield Atom chips. Try as it may, Intel will have to accept defeat in mobile, as ARM holds a 95% mobile market share.

Hold:

  • WinARM: Old buddy Microsoft made Intel's worst nightmares come true. The Redmond giant has opened up Windows 8 to ARM architecture. WinARM is gathering forces, with laptop makers pairing with NVIDIA and Qualcomm to launch computers as early as late 2012. NVIDIA in particular is excited about WinARM, in line with its recent mobile mindset and chipsets. Intel still holds the lead in traditional PCs, but the stage is being set for a glorious battle between Intel and the ARMed forces. We'll have to wait to see who wins this war.
  • Maturity: The PC market has matured a lot since the '90s, and that growth is gone for good. There will always be growth, but not like in the early days of widespread consumer PC adoption. Enterprise upgrade cycles will happen every few years, as will consumer upgrades, but it pales in comparison with the breakneck growth Intel saw in its glory days. IDC expects 2012 worldwide PC shipments to grow by 9.3%, accelerating from the 2.8% this year should put up. Compare that with the '90s, when growth in the mid- to upper teens was common, even sometimes considered slow compared with the 23% and 25% growth seen in 1994 and 1995, respectively.

The verdict
This one is a mixed bag. As a growth investor, I would never buy shares since Intel's growth days are in the rearview mirror. It will still continue to grow modestly, but the stock has matured into a value investment at this point. I would hold shares if I already owned them, even though Intel will probably never make it in mobile. Missing out on mobile alone doesn't justify selling, though, since Intel has plenty of other things going for it.

From a value investor's perspective, Intel is a buy. It's an industry leader and even pays a healthy dividend yield around 3.4%. Free cash flow rose by 73% last year, and shares trade at 10.6 times earnings, which is less than its peers.

It just depends on what you're looking for.

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Fool contributor Evan Niu has sold bullish put spreads on Qualcomm and NVIDIA. He owns shares of ARM Holdings but has no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Intel, Qualcomm, and Microsoft and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Microsoft, Intel, and NVIDIA, writing puts in NVIDIA, and creating bull call spread positions in Intel and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (1)

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  • Report this Comment On December 30, 2011, at 9:51 PM, techy46 wrote:

    Agree, Intel's latter to the mobile PC market than Microsoft but it'ss be interesting to see Windows a play WinARM versus Wintel in tablets at least. I'm still wonder what'll happen when the smart phone really becomes the mobile PC and can talk to all screen sizes in your auto, home or work. Intel's Atom 3d 22nm could be ready by then.

  • Report this Comment On December 30, 2011, at 9:58 PM, jdwelch62 wrote:

    I think it's way too early to declare that Intel has "missed out on mobile". The smartphone revolution is just starting, and viable tablets (iPad) have only been around for less than 2 years. Think back to the mid-'90s when Intel unleashed the Pentium Pro server; at that time, 95% of "servers" were mainframes and minicomputers such as Digital Equipment Corp's VAX line. Now, Intel controls >90% of the Internet on the data center side. I wouldn't count Intel out of this battle yet. Also, from a PC growth perspective, I think you've taken too much of a developed-market-centric view of things; look at Intel's numbers over the last 2 years, and you'll see levels of revenue growth that any "growth" company would envy. Last year was Intel's first $40Billion year, and this year it will top $50Billion in revenues. Why? Emerging markets are just now getting a taste for affordable computing, and most of those folks are buying PCs first, not smartphones or tablets. There's still a lot of growth left globally for the PC. I suggest you crack open Intel's statements and check the numbers, rather than relying on IDC and Gartner to do your research for you, Evan...

  • Report this Comment On December 30, 2011, at 11:19 PM, russfischer1013 wrote:

    A 30% linear shrink (32nm to 22nm) produces a chip 1/2 the area....square function thing, you know. Oh, I guess you don't know.

    Here's the Intel Investment Thesis:

    Manufacturing Capacity

    In the 2010 fourth quarter earnings conference call, Intel management discussed a process shrink from 32nm to 22nm. They also mentioned that they have three primary fabrication centers. With a shrink to 22nm those three facilities could be reduced to two and have the same chip output. Surprisingly, the CEO announced that Intel would be going to a four fab model. This move effectively doubles the number of chips the company could produce relative to 32nm.

    What is the added capacity to be used for?

    From Paul Otellini:

    As we approach our 22-nanometer transition, we are increasing our investments in manufacturing to capture what we believe is a significant opportunity for growth. Stacy will walk you through more details in just in a moment, but in short the market opportunities for our 22-nanometer products are outstanding. As a result, we are growing from the model of three high volume leading-edge manufacturing fabs to four

    Our 22-nanometer process will be the foundation for growing PC and server segments, as well as a broad family of Atom-based SoCs, serving smartphones, tablets, smart TVs, and other embedded devices.

    Technology

    With the move to 22nm, Intel has grown the lead over the best in class competition to as much as two generations of manufacturing technology. This 22nm technology will also feature TriGate transistors that will increase the performance of the transistors while reducing power consumed dramatically. Some recent information indicates a reduction of 95% in quiescent power consumption when compared to 32nm planar transistors.

    Ultrabook

    Intel is promoting a notebook format called the “Ultrabook”. This product is a thin packaging format similar to the MacBookAir. Intel is subsidizing tooling and supply chain establishment for PC manufacturers to the extent of $300 million. The Ultrabook, in most cases, will be too thin to use a hard disc drive, so flash based solid state drives should have huge growth as this plays out over the next 2-3 years. The boot time for an Ultrabook with a SSD will be seconds, the performance will be much higher relative to a HDD PC and it will be “always connected” even when in sleep mode. The elimination of a HDD and the low power level of the new 22nm TriGate Intel processors will extend battery life substantially.

    Intel makes Solid State Drives. The Intel/Micron partnership has produced the world’s first 128Gb flash chip in the Micron/Intel joint venture fab in Singapore:

    http://seekingalpha.com/news-article/2097633-photo-release-i... The article seems to imply an eight chip stack of these chips to produce a 128GB SSD in a thumbnail size format.

    Mobile

    Many analysts give Intel a bad rap due to their lack of involvement in smart phones and tablet computers. Some even feel that embedded ARM processors represent a serious threat to Intel long term.

    The real fact is that Intel has an architecture that is very high on computational power and also higher on electrical power than these mobile devices could tolerate. Looking at this from the recent past, Intel would not call the mobile business a served market. The devices neither needed the compute power offered by intel nor could they tolerate the higher power level.

    That all changes at the 22nm Trigate node. The mobile devices need for more compute power than ARM processors can provide is growing and the latest Intel technology will meet or beat the electrical power requirements of these mobile devices.

    The bottom line is that Intel could not participate in this segment until now. They could, however, prepare for engagement in the mobile business. They have done this by building manufacturing capacity and designing low power functional blocks while waiting for their 22nm manufacturing plants.

    We can expect some interesting announcements at the upcoming Consumer Electronics Show in January.

    Infineon

    Bought Infineon’s baseband business in order to have a complete, hassle free, market proven baseband solution that can be embedded in an application processor SoC.

    FPGA

    In an unprecedented move, Intel is doing foundry work for a startup FPGA company. Intel is giving Achronix Simiconductor access to its 22nm TriGate process.

    The speculation is that the payoff for Intel is complete access to the Achronix technology for embedding with Atom processors in order to give mobile products OEM customers a level of product design flexibility not available from any other application processor vendor.

    http://online.wsj.com/article/SB1000142405274870447790457558...

    http://www.eetimes.com/electronics-news/4210263/Intel-to-fab...

    Security

    A while back Intel bought McAfee, probably not just because they like to write big checks. McAfee announced DeepSAFE at the Intel developers forum. DeepSAFE provides security near the silicon level, beneath the operating system. It is very possible that Ultrabooks shipped with the new Intel Ivy Bridge CPUs will have a final solution to the exasperating problems of malware by putting “hooks” in the chip that makes all other security software obsolete. This could be rocket fuel that launches the Ultrabook next year.

    Apple

    Apple and Samsung are locked into 30 different lawsuits in nine countries. To me it is obvious that Apple can no longer depend on Samsung as a supplier of critical component such as their “A” series of application processors.

    The scale of this business will soon approach 300 million devices between the iPod, iPad, and iPhone. The current A5 chip is 122 sq mm in size. That means that 500 chips can be produced on a 12” wafer. 300 million chips will require a leading edge manufacturing capacity of 600,000 wafers per year. That level of capacity/technology only exists at two companies in the world, Samsung and Intel. The Intel technology is two generations advanced from the Samsung process, so moving to Intel would produce a smaller A5 chip at higher speed and even lower power.

    The Citi semiconductor analyst feels this is a distinct possibility and could be made public around the end of the year. http://www.cnbc.com/id/43327072?__source=yahoo|headline|quot...

    In the latest earnings conference call, Otellini was asked if Intel is doing foundry work for anyone. His answer was that they are doing a small amount in the FPGA area (Achronix), and “a couple of strategic customers that I am unable to discuss at this time”. Would Apple be considered strategic?

    While I’m at it, why would Intel do foundry work for a startup FPGA company? My guess is that Intel intends to include a chunk of FPGA in their first mobile SoC product. That would give unparalleled design flexibility to end customers who select that part.

    Side note: Apple and Intel have collaborated on the development of the Thunderbolt technology used in the Apple computers. This is an exclusive arrangement for some period of time, after which it will be opened to other equipment manufacturers. Intel makes the part.

    The Intel investment thesis

    • Ultrabooks will stimulate a new growth cycle in PCs.

    • Solid State Drives represent a $70 billion flash memory opportunity with Intel positioned well.

    • Intel has a huge fabrication technology lead over the next best competitor.

    • Intel is actively building out capacity to serve these new opportunities.

    • Intel’s mobile engagement will begin in 2012.

    • A final security solution.

    • An Apple/Intel relationship is very likely to come out of nowhere to surprise the doubters.

    • An Atom based SoC with embedded baseband and FPGA?

    • Intel’s additional manufacturing capacity could support a relatively short term doubling of the company.

  • Report this Comment On December 30, 2011, at 11:49 PM, loudcld wrote:

    Great post russfischer1013. Thank you!

    I already doubled my investment in Intel based on their progress in the 3-D transistor earlier this year. I looking to to add Intel to my dad's portfolio next year from a solid dividend with some growth potential perspective.

  • Report this Comment On December 31, 2011, at 12:15 AM, stretcho44 wrote:

    Even Jean-Luc Pelloie, Fellow Director of SOI Technology, ARM, thinks that the Intel 22nm FINFET process is a game changer.

    FINFET: Has its time finally come for a sub - 20nm 3D device?

    Jean Luc Pelloie,

    21 December 2011

    http://blogs.arm.com/soc-design/651-finfet-has-its-time-fina...

  • Report this Comment On December 31, 2011, at 9:20 AM, webmind wrote:

    Couldn't agree more with the comments. To say Intel has lost the mobile war is ludicrous. In fact with their superior R&D and manufacturing technology they will ultimately win this war.

    Thanks for saying Intel can't compete in mobile. Now I know they can.

  • Report this Comment On January 02, 2012, at 6:38 PM, symbolset wrote:

    Medfield is not going to make it. They're bumping up Cedar Trail to June for the Windows 8 launch. Nobody's going to make a Medfield Android tablet with that coming down the pike, and nobody wants a Windows 7 tablet.

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