5 Reasons to Buy Intel in 2013

Intel (NASDAQ: INTC  ) has seen six downgrades since the beginning of the year, prompted by continued softness in the PC industry. The culprit? The explosive rise of the smartphone and tablet market, where Intel does not command a stronghold. According to Gartner, worldwide PC shipments declined by 8.3% in the third quarter. Combined, these factors have fueled a 16% sell-off in Intel shares this year, negatively skewing sentiment along the way. Although Intel may be down, it's far too early to count this chip giant out. All signs are pointing to a Chipzilla comeback in the years ahead as it continues to shrink its processors to become more energy efficient for the mobile computing era. This has created an attractive entry for investors patient enough to wait for the technological tides to shift back in Intel's favor.

Value inside!
Intel is currently trading at roughly nine times trailing-12-month earnings, offering a 24% discount to its five-year expected growth rate. Historically, Intel has grown earnings on average of 22.8% over the past five years, and if we use history as our guide, shares are currently trading at a 61% discount to its historical growth rate. Factor in a 4.4% dividend yield, 13.8% five-year cash flow growth, and $10.5 billion in cash, and shares are downright attractive.

Vertically integrated
Intel is essentially the last vertically integrated chip manufacturer on the planet. It allows Intel to treat design and implementation as one element, which reduces conflicts between engineers and manufacturers. NVIDIA (NASDAQ: NVDA  ) and Qualcomm (NASDAQ: QCOM  ) , on the other hand, outsource their chip manufacturing needs to Taiwan Semiconductors (NYSE: TSM  ) . This "fabless" model creates friction among customers competing for capacity and puts strain on the customer-business relationship when the manufacturer fails to meet demand. Earlier this year, when TSMC's 28-nanometer fabrication process was beginning to ramp, both Qualcomm and NVIDIA were bottlenecked by TSMC's lack of capacity, and experienced supply shortages of new products. Although operating a foundry has its own set of challenges and high costs, Intel's approach to manufacturing is more unified, which invites a stronger team-based approach when production problems arise.

Best-in-class fabrication
When you boil it down, Intel is a technological beast. Its manufacturing process is estimated to be three years ahead of TSMC's -- eons for the world of chips. TSMC is currently producing chips based on a 28-nanonmeter process, where Intel is producing chips based on 22 nanonmeters. In the coming years, Intel will continue to shrink transistors, which will make its less power efficient architecture less disadvantaged against rival ARM Holdings (NASDAQ: ARMH  ) . This will be the key driver of Intel's advancement in mobile computing where ARM is commands the lion's share.

Aggressive road map
By 2014, Intel expects that 14-nanometer chips will ship out of its foundries, and TSMC is expected to have begun its 20-nanometer process. At that time, the power gap between Intel Atom and ARM will be nonexistent, and we're beginning to see proof of this today. Intel's Centerton Atom, intended for extreme low-power servers, consumes 6 watts of energy. Compared with Calxeda's ARM-based server chip, the two are essentially at power consumption parity. In 2013, Intel is expected to release Avoton, the successor to Centerton, which will be fabricated with on a smaller 22-nanometer node. This will lead to further efficiency gains, paving the way for Intel to release some compelling mobile processors for the smartphone and tablet space.

Big spender
Given that Intel's R&D budget is expected to reach $10.1 billion in 2012, it safe to say that Intel is taking its future seriously. Putting that number into perspective, it's larger than NVIDIA's and AMD's combined market cap, and compared with TSMC's budget, it's nearly 10 times the size. It's not surprising the No. 1 leader in R&D spending is the same company that's technologically three years ahead of the competition.

The future is Intel
As an investor, I have investing for tomorrow at today's prices as one of my main emphases. Come tomorrow, Intel is going to be a much stronger competitive position than it is today. Intel will get there by focusing on power efficiency, which will ultimately lead to market share gains in the highly coveted mobile computing space. Intel's R&D budget will allow it to maintain its competitive lead against rivals. In a few short years, these efforts will come together and should allow Intel to penetrate this market. For investors, the valuation is right, the timing is not too far off, and the opportunity is huge. Go long before 14-nanometer chips hit the scene. The market is practically giving away Intel at these levels.

If you'd like to learn more about the future of Intel, The Motley Fool has created a premium research report on Intel, where our analyst runs through all of the key topics investors should understand about the chip giant. You can expect to to receive updates for an entire year as key developments unfold. Click here now to learn more.


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  • Report this Comment On January 02, 2013, at 7:31 AM, markpm wrote:

    A couple of observations:

    - Intel and TSMC operate on different process node steps. Intel is 45/32/22nm, TSMC and others are 40/28/20nm. So Intel is not actually 3 years ahead of TSMC etc, more like 18 months. This interval has been very constant over time, Intel is not pulling further ahead here.

    - Centerton and Calxeda's ARM are not at power parity. Intel's power numbers do not include such features as RAM and network interfaces, which are included in the ARM numbers.

    There is no doubt Intel is focusing heavily on reducing power, and has a very good chance of becoming competitive at some point. However one big unaddressed question is at what cost? ARM vendors are accustomed to far lower margins than Intel. Will Intel really be willing to reduce their prices to compete directly against the entire ARM ecosystem, or will they forever cede the low end of the market to ARM and hope they can charge a premium for functionality such as x86 compatibility?

  • Report this Comment On January 04, 2013, at 9:33 AM, TMFRhino wrote:

    Very nice comment, Mark!

  • Report this Comment On January 07, 2013, at 10:58 AM, derekdickerson wrote:

    Intel can outsell arm just look at AMD they undercut them in the X86 market but couldn't win.

    That being said most of the marketing BS that is about low wattage Atom is fake. \ ARMH should be getting more credit than they are.

    We really need Linux Ported to the processors faster.

    Company's that are depending on ARM are:

    Samsung

    Nvidia

    Apple

    Google

    Facebook

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