Why Intel Is a Core Stock for Your Portfolio

What can I say about Intel (Nasdaq: INTC  ) that hasn't already been said? You probably already believe the company deserves a core spot in your portfolio -- or you're skeptical despite the evidence you've already seen. I've pulled together some amazing numbers to explain why Intel is the heart of high-tech, backed by a brief history of computing that explains how it got there. If you want to invest in the future of technology, I can't think of a better stock.

The business
Intel is the world's largest semiconductor manufacturer, and one of the most profitable. Here's a bird's-eye view of Intel's place atop the industry.

Industry Segment

Global Market Share

Semiconductors 15.9%
Microprocessors 83.7%
Desktop Processors 75.8%
Mobile Processors 82.3%
Server Processors 95.1%
Smartphone and Tablet Processors 0%*

Sources: iSuppli and International Data Corporation (IDC).

The asterisk next to that last segment awaits Intel's long-anticipated mobile beachhead this year. Granted, the company has an uphill battle to fight against ARM Holdings (Nasdaq: ARMH  ) designs, but there are reasons to believe Intel can make the climb. There's ample precedent, which you'll discover further on.

Despite being caught off-guard by the smartphone explosion, Intel's still managed to capitalize on broader worldwide computing demands in a big way:

Intel Corporation Total Return Price Chart

Intel Corporation Total Return Price Chart by YCharts

Let's break that down a little more. How has Intel's stock price grown over progressively longer periods of time? It's also worth noting that Intel began paying a dividend at the end of 1992, so let's look at the company's annualized dividend growth as well.

Annualized Growth

Stock Price

Dividends

Over 5 Years 8.6% 16%
Over 10 Years (0.3%) 26.5%
Over 15 Years 3.8% 26.4%
Over 20 Years 15.3% 24.8%*

Source: Yahoo! Finance.
*19-year annualized growth rates used.

Shareholders who got in during the dot-com era haven't seen the same returns as those who jumped in decades ago, but I shouldn't have to tell you how many other high-tech blue-chip stocks are in the same boat. So why Intel, and why now? Here's why.

Why it's a core holding: the history
As I mentioned, there are historical precedents for believing that the chip giant can come roaring back in the mobile race. Intel wasn't at the vanguard of the early computer age, and it wasn't a first-mover in server chips. But as you've seen, Intel is now the undisputed leader in both segments.

By the time Apple (Nasdaq: AAPL  ) began to grab personal-computing market share at the beginning of the '80s with the Apple II, it shared a rapidly expanding stage. Atari, RadioShack, and Commodore had been market leaders since the late '70s, gaining ground on early computer manufacturers that were producing what can generously be described as highly un-user-friendly machines.

None of the four major early computer players used Intel processors. It wasn't until the IBM PC and its clones began selling millions of units in 1984 that Intel established a firm foothold in the market. We know how that turned out. Even Apple eventually made the switch to Intel-powered Macs.

Much of the early Internet ran on servers with Oracle (Nasdaq: ORCL  ) subsidiary Sun Microsystems processors, but the company's leading position dropped precipitously after the turn of the century. Intel made substantial inroads after Sun's fall, but it had to share the market with IBM PowerPC processors and AMD (NYSE: AMD  ) Opterons.

Intel's x86 architecture (which includes AMD designs) didn't pass the market-share halfway point until near the end of 2004, and AMD commanded a quarter of the x86 server market as late as 2006. We know how that turned out.

Why it's a core holding: the future
ARM's CEO recently dismissed Intel's mobile chances, but I wouldn't be surprised if he's secretly quite worried. It would take ARM more than 15 years to invest as much into research as Intel spends in a single quarter. That kind of scale matters a lot in semiconductors. Intel has it in spades, both in terms of its finances and its production capacity. Intel is also the only fully vertically integrated processor maker, keeping its chips in-house from tech spec to final production.

Technology also matters. Intel's upcoming 22-nanometer chips will be the first mass-produced processors in the world to feature 3-D transistors, a unique feature known as the tri-gate. Thanks to this feature, power use can be cut in half while still boosting chip performance by a third. These chips should be rolling off the assembly line by midyear, and Intel plans further size reductions, aiming for 10 nanometers by the middle of the decade. ARM's behind that curve, and its low-power advantage may already be diminishing as it progresses toward smaller transistor widths.

Risks to watch
The tri-gate may not be ready for prime time. Intel might suffer fabrication issues that delay its planned rollouts. The world economy might tank again, temporarily reducing demand for all kinds of computing. ARM might capitalize on major breakthroughs that Intel can't access. Technology is hard to predict, but none of these issues appears to represent a death knell for Intel. The chipmaker's already years ahead of ARM foundry Taiwan Semiconductor in manufacturing processes, and that lead's soon likely to grow.

The bottom line
Intel keeps the world computing. Even if its chips aren't yet in mobile devices, they still run the servers that feed each smartphone and tablet its data. Even if the PC is in decline, Intel's making great progress toward mobile integration. If Moore's Law is ever broken, it's almost certain Intel will reach that point first. Past that, who knows? Maybe Intel-branded quantum computing will hit the market in a few decades and we'll finally reach that singularity Ray Kurzweil keeps talking about.

Intel's a global leader in computing, but you wouldn't want to put everything into one stock. If you're looking for other companies dominating the world, there's a brand-new free report you've got to see. In it, you'll find three great global brands that are putting down roots in the biggest emerging markets and putting out major growth for their shareholders. Find out what the best investors already know. Get your free copy today while it's still available.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter for more news and insights. The Motley Fool owns shares of Oracle, Apple, RadioShack, Intel, and IBM. Motley Fool newsletter services have recommended buying shares of Apple and Intel and creating a bull call spread position in Apple. 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 (4) | Recommend This Article (8)

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  • Report this Comment On January 26, 2012, at 11:00 PM, russfischer1013 wrote:

    Your article was a very, very good write.

    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 Semiconductor 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 January 27, 2012, at 12:16 AM, jdwelch62 wrote:

    Great article, Alex! Where have you been all these weeks and months while we've been suffering thru so many articles that have been slamming Intel for not yet being in the mobile space??? I hope my Foolish good buddy Evan Niu has read this, as well as the excellent analysis thesis by russfischer1013 that followed above! You, too, Eric Bleeker! Apple may yet fall from the collective consumers' grace, but I'll wager a goodly portion of my portfolio that whatever steps in to take the iProducts' place will have Intel Inside!!!

    Wow, I feel so much better now!

    Disclosure: I am Long INTC. (Duh!)

    Fool on!... :-)

  • Report this Comment On January 27, 2012, at 1:24 AM, lanceim59 wrote:

    Wow! Russfischer1013's article is 10x more informative than Alex Plane's article. Maybe you guys at the Motley Fool should hire him.

  • Report this Comment On January 27, 2012, at 12:24 PM, jpanspac wrote:

    " If Moore's Law is ever broken, it's almost certain Intel will reach that point first."

    Moore's Law indicates progress. If it breaks that would be a bad thing. Intel would not want to get there first.

    Other than that, good article.

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