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Dow 30 Profile: Intel
Intel (INTC - Free Intel Stock Report) is a Dow-30 component and the leading manufacturer of semiconductors across the globe. The company’s main products include microprocessors, microcontrollers, and memory chips. Intel serves many different end markets, including personal computers, communications, industrial automation, military, and other electronic equipment. Foreign revenues account for the majority of the company’s top line.
A Little History
Intel was founded in 1968 by Gordon E. Moore (of “Moore’s Law) and Robert Noyce after they left Fairchild Semiconductor. The third employee was Andy Grove, who held the reins at Intel for a good portion of the 1980s and the 1990s. The company was initially called Integrated Electronics or Intel for short (using the first three letters of Integrated and the first two letters of Electronics). Intel has grown through several distinct phases over its history. During its initial stages, the company was identified by its ability to manufacture chips, most notably static random access memory (SRAM) transistors. The industry behemoth’s business grew markedly during the 1970s, as it expanded and improved its manufacturing processes and diversified its product portfolio. However, memory devices still continued to be the company’s bread-and-butter. The chipmaker developed the first commercially available microprocessor in 1971 (the Intel 4004) and one of the first microcomputers in 1972.
Ramp To Its Current Structure
The company’s top and bottom lines grew markedly during the 1980s and 1990s, thanks largely to memory microprocessors that were used in personal computers. Specifically, Intel’s Pentium chips became a household name, as they were utilized in many personal computers. Following 2000, growth in demand for higher-end microprocessors slowed. Competitors, most notably Advanced Micro Devices (AMD), gained market share across most product segments, which hurt Intel’s growth. The company’s then-CEO Craig Barrett attempted to diversify the company’s business beyond microprocessors, though most of these endeavors didn’t prove fruitful (the communications market, for example).
To offset the negative momentum, Intel unveiled a new product development model to regain its technological lead. Named the “tick-tock model”, the plan was based on annual alteration of microarchitecture and process innovation. In 2006, Intel produced Pentium and NetBurst products with a reduced die size of 65 nanometers. Not long after, it unveiled its Core microarchitecture that was well received by the market. This product was perceived as an exceptional leap in processor performance, as it reduced bottlenecks related to its predecessor (NetBurst) and helped the company regain its competitive edge. In 2007, Intel received another boost with the introduction of the Penryn microarchitecture, undergoing a die shrink from 65 nm to 45 nm. What’s more, the following year, the company released the successful Nehalem microprocessor, along with the die shrink to the 32-nanometer manufacturing process. Each time that AMD made strides against Intel, the industry bellwether battled back, using its immense size and technological capabilities to its advantage. Ultimately, the company at least made up its lost market share against rival AMD.
Growth Via Acquisitions…
The company has regained its position as the industry heavyweight and its strong management gives it a leg up on many of its competitors, in our opinion. The tech giant’s share of the microprocessor market is about 80%. This sector, however, is economically sensitive. Therefore, Intel has once again expanded its reach into other areas. It purchased McAfee, a manufacturer of computer security technology. The purchase price was nearly $7.7 billion, which represents the largest acquisition in the company’s history. What’s more, tech stalwart acquired Infineon Technologies’ Wireless Solutions business for $1.4 billion. This purchase enables Intel to expand its current Wi-Fi and 4G WiMax offerings to include Infineon’s 3G capabilities and supports Intel’s plans to accelerate LTE (long-term evolution) of products.
We view these moves as a solid long-term strategy. Though Intel has been a formidable force in the personal computer market for decades, its lack of presence in other key segments of the semiconductor segment may well have constrained its earnings-growth potential. What’s more, we think that this segment diversification will serve the company well, as the personal computer industry has seen intense competition and falling average selling prices in recent years.
…And Manufacturing And Margin Enhancements
Intel invests aggressively in research and development, which we feel will continue, and result in a steady influx of interesting and successful new products. That said, we look for revenues to climb at a mid-single-digit clip in the foreseeable future, while annual earnings should grow at a double-digit rate. We feel that the primary avenue for margin gains will be via further manufacturing improvements. The company currently manufactures the majority of its chips on a 32-nanometer process. We look for it to shortly transition to a 22-nanometer methodology. Looking further out, we look for Intel to produce chips via a 16-nanometer process and an 11-nanometer transition is likely after that. Die shrink helps to improve costs by allowing more transistors to be placed on each wafer. Another factor worth keeping an eye on is the company’s international exposure. Foreign revenues constitute about 85% of the company’s total. We look for this number to inch higher going forward as emerging markets, such as India and China, have ample room for growth, in our view.
Intel remains a lucrative choice for those seeking exposure to the technology sector. In recent years, these shares have posted competitive returns compared to the Value Line (Arithmetic) Index with a below-average level of risk. Indeed, Intel shares receive one of Value Lines’s top ranks for Safety and have solid scores for Stock Price Stability. This is especially impressive for a semiconductor manufacturer, given the volatile nature of the industry. Also, the company pays a hefty dividend, currently $0.84 a share on an annualized basis. We look for further increases down the road based on our profit-growth assumptions for the company. Investors should be aware though, that the company is susceptible to tough economic times, though to a lesser extent then many of its competitors.
At the time of this writing, the author did not have any positions in any of the companies mentioned.