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.
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.
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.
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.
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.