Company Description
Intel designs, manufactures,
and markets high-performance microprocessor units (MPUs) and related chips for
the PC market. We believe Intel sells approximately 80% of MPUs in the PC
market and that it has the ability to establish standards in the PC market,
given its dominant position.
Valuation
We rate INTC Outperform. We
believe the current strength in the industry's fundamentals should continue to
attract investors. In our view, the seasonal uptick in PC demand (typical for
the second half of any given year) has combined with strength in the communications,
internet infrastructure, and digital consumer end markets to cause overall
semiconductor demand to accelerate. Our 12-month target price of $95 assumes
that Intel would be fairly valued at a 10% premium to the market multiple
(based on our 2000 EPS estimate for Intel and consensus estimates for the
S&P Industrials). In our view, INTC is suitable for investors with a
tolerance for the price volatility associated with technology stocks.
Key Investment
Positives
• Tailored
MPU'products for market segments. Intel developed MPUs to
address the major segments of the PC market, ranging from Celeron for low-cost
PCs up to Xeon for the high-performance server and workstation segments.
Intel's next generation Pentium-111 MPU was officially introduced on February
26, 1999. We expect the company to transition the desktop PC, notebook PC, and
server markets to the Pentium-111 family in the second half of this year.
Pentium Ill-enabled PCs have been launched at aggressive price points, which
has offered improved price/ performance for end-users — particularly for
Internet applications using today's modems. Since the Pentium-111 die is only
slightly larger than Pentium-11's, we expect Pentium-Ill to ultimately obsolete
the Pentium-11 during the next several quarters.
• We believe Intel's
competitive advantage is its ability to establish and drive PC technology and
standards. In our view, the company has successfully shifted the PC architecture
in its favor by developing new industry standards to enhance system performance
and functionality. Intel's ability to establish standards for the PC market
gives us confidence that the company can sustain its competitive advantage.
• We believe
Intel is the strongest semiconductor manufacturing company in the world today. Despite the delay
in the introduction of the 0.18-micron versions of its Pentium 111
microprocessors, we maintain our belief that Intel's leading-edge manufacturing
capabilities enable the company to introduce faster, more feature rich MPU
solutions ahead of its competitors. The company's ability to continue to
introduce more performance at its segmented MPU price points has kept its
overall ASP (average selling price) from declining. In retrospect, the company
found that its internal goal to ramp its 0.18-micron process technology was
simply too aggressive.
• Acquisitions
aimed at expanding Intel's presence in the networking and telecommunications
market segments. In August 1999, Intel acquired Level One
Communications. Level One is a major supplier of mixed-signal communications
ICs for Ethernet, Fast Ethernet and Gigabit
Intel Stock Price
History
Monthly
Ethernet for networking, and WAN technologies
for the telecommunications markets. We believe the acquisition is strategic and
will compliment Intel's current networking product portfolio. In July 1999,
Intel acquired Dialogic, which provides open standard hardware and software
solutions for voice and data networking. This acquisition is aimed at expanding
Intel's server business in the networking and telecommunications market
segments. In September 1999, Intel agreed to acquire the Telecom Component
Products division of Stanford Communications. This division possesses some of
the key semiconductor building blocks required to participate in the broadband
cable and wireless markets. Intel should become a more significant player
within the rapidly emerging cable modem, digital
cable set-top box,
cable head-end, LMDS, and MMDS markets.
Key Investment
Risks
• Paradigm
shift could force change in business model.
As with any large, entrenched company, there
is the risk of a major shift that enables new competition or changes the way in
which systems are designed. Intel's operating model is based on shipping large
quantities ofhigh-ASP microprocessors that fund massive manufacturing
developments. If the overall PC market were to shift decisively toward the
network computer or low-cost PCs, dramatically reducing microprocessor ASPs,
the company would need to make significant changes in its business model, which
could adversely affect its financial strength.