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Intel Corporation

Leader in Microprocessors Chips Away at Tablet, Smartphone Market

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Intel (ticker: INTC) remains the global leader in the production of the microprocessors going into a wide range of personal computers and other technology devices. Consumers increasingly are opting for alternative computing devices such as smartphones and tablet computers, however. The technology giant therefore is ad­vancing on several fronts to increase its share of these faster-growing, highly competitive markets.


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For example, Intel reportedly has spent about $300 million to promote the development of ultrabooks — sleek new tablet computers — that could run on Intel microprocessors. Such ultrabooks would compete against the market-dominating iPad, which runs on Apple’s own chips. The company recently reported that computer makers have developed more than 70 ultrabook designs.

Intel designs, manufactures and markets integrated circuits used in a wide range of technology products. Its microprocessors are used in desktop computers, laptops, notebooks and netbooks. Intel components go into network servers, workstations, data-storage products, embedded applications, communication devices, mobile devices and consumer electronics.

The company supplies chipsets — circuitry that moves data between the microprocessor and a computer’s display; input and storage devices such as the keyboard, mouse, monitor and hard drive; as well as DVD drives and other peripherals.

Intel provides on a single chip circuits linking its core processing functions with other system components such as graphics, audio and video. Intel’s NAND flash memory products are used in portable memory storage devices, digital camera memory cards and solid-state storage drives. Its software products are used to develop applications and to run a variety of devices.

In choosing Intel as the Stock to Study, members of the magazine’s Editorial Advisory and Securities Review Committee cited the company’s growth prospects in the smartphone and tablet segments. They also described the stock’s valuation as very reasonable.

Another factor was Intel’s strong dividend yield. Also, Intel’s board has raised the dividend regularly over the past seven years. In November 2010, the company’s board ordered the payout to shareholders be increased 14.3 percent to $0.18. Late this year the dividend rose 16 percent to $0.21.

Corporate Story

Intel (from “integrated electronics”) developed the world’s first computer microprocessor in 1971. The company was launched in 1968 by Fairchild Semi­conductor engineers Robert Noyce and Gordon Moore, who struck out on their own to produce semiconductor memory products.

They were shortly joined by Andrew S. Grove, another Fairchild employee, who went on to be­come Intel’s longtime CEO and then chairman. He retired in 2005.

Paul S. Otellini, 60, is president and CEO. He was named chief executive in 2005. Otellini joined Intel in 1974. Jane E. Shaw, retired chairman and CEO of the medical device company Aerogen, is chairman of Intel’s board.

Intel has long dominated the market for microprocessors in personal computers, most notably with its Pentium chip series. The company is believed to command about 85 percent of the global market for such microprocessors, which serve as the central processing units of computer systems.

PC demand in recent years has slowed, however, as consumers increasingly show a preference for smartphones and other alternatives to traditional computing. Argus, an independent investment research source, estimates that about 400 million smartphones are sold worldwide each year.

The research company estimates that 428 million PCs will be sold worldwide this year, up 16 percent from 367 million in 2010. Of the 2011 total, 64 million units will be tablets, up 276.5 percent from 17 million the year before.

Intel has reduced its dependence on orders from manufacturers of traditional PCs by branching out. It also supplies producers of consumer electronics such as digital televisions, media recorders, smartphones, digital cameras, tablet computers and wireless devices.

International markets provide additional diversification, with foreign business constituting 80.3 percent of 2010 sales. The Asia-Pacific region accounted for 33.2 percent of the company’s 2010 sales and represented Intel’s largest market.

Demand for PCs in the developed economies of North America and Europe has weakened in recent quarters, but sales in emerging markets show continued strength. Intel reports particularly strong sales growth for its PC products in China, India and Indonesia.

The PC Client Group is the largest segment, accounting for $31.6 billion of 2010 revenue — 72.4 percent of the total. The unit supplies microprocessors and chipsets for desktops, notebooks and netbooks. The segment also produces circuit motherboards for desktop PCs and wireless connectivity products.

The Data Center Group produced $8.7 billion in sales — 19.9 percent of the total. It manufactures microprocessors, chipsets, motherboards and wired connectivity devices for servers, workstations, storage devices and other elements of data center and cloud computing systems. The continued increase in traffic on the Internet is among the segment’s growth drivers.

Other Intel architecture segments collectively generated $1.8 billion — 4.1 percent of the total. These smaller business units include Intel’s Embedded and Communications Group, which produces scalable microproc­essors and chipsets for embedded applications.

The Ultra-Mobility Group markets microprocessors and chipsets used in mobile Internet devices. The Digital Home Group distributes components used in consumer electronics. Additional business sources accounted for $1.5 billion — 3.6 percent of 2010 revenue.

Institutions recently owned 68.3 percent of 5.2 billion shares outstanding, Morningstar reports. Exec­utive officers and board directors held less than 1 percent.

Competitive Landscape

Morningstar lists only publicly traded Advanced Micro Devices (AMD) as a competitor. Yahoo! Finance adds publicly traded Texas Instruments (TXN) and privately held Samsung Electronics. As Intel strives to diversify, however, an additional competitor is publicly traded ARM Holdings (ARMH). Based in the United Kindom, the company licenses its technologies and collects royalties for every installed chip.

ARM-based chips are believed to command up to 95 percent of the global market for use in devices such as smartphones and tablet computers. Its low-end chips consume less power — an important consideration in devices running on batteries.

Intel chips, in contrast, have better capabilities but require correspondingly more power to operate. The company is developing chips that will draw less power and therefore be more competitive for use in mobile devices.

At the same time, ARM is working on more capable chips that could challenge Intel in the company’s primary markets.

Intel added to its diversification by making two major acquisitions early this year. In February it paid $7.7 billion for McAfee, a leading supplier of computer security technology. McAfee reported sales of $2 billion in 2009.

Intel is introducing DeepSAFE, its first McAfee product since the acquisition. DeepSAFE combines hardware and software in a system designed to detect previously unknown security breeches in a computer.

New Initiatives

In a $1.4 billion deal, Intel also acquired the wireless solutions business of Infineon Technologies AG, a German company. Infineon’s WLS unit is a leading provider of cellular platforms for telephone manufacturers. The January 2011 acquisition strengthened Intel’s position in the Internet connectivity segment of the technology industry.

Intel has several new research ini­tiatives in progress. In September it an­nounced a partnership with Google to optimize the Android oper­ating system for its processors. The deal could help Intel make inroads in mobile device markets.

The company announced it contributed about $75 million toward a $4.4 billion industry consortium to develop new chip technology at facilities in New York state. Intel and other leading technology companies are teaming up to perfect processes for making smaller, lower-cost chips.

The chip industry currently produces chips on silicon wafers with diameters of 300 millimeters. Pro­ducing larger wafers with room for more chips per wafer would lower costs. The industry hopes to perfect a 450-mm wafer by 2020.

Producing chips with miniaturized circuits that fit closer together is another goal, with separations measured in nanometers — billionths of a meter, in other words.

Intel already has plans for smaller 22-nanometer manufacturing, and the company envisions chip designs with a standard of 10 nanometers or less within five years.

Final Notes

Readers are urged to conduct their own studies of Intel using the BetterInvesting methodology. The Stock to Study goal is a doubling in investment value (appreciation plus dividends) within five years. No investment recommendation is intended.

BetterInvesting featured Intel as the Stock to Study in the February 1994 and April 2002 issues. Intel was the Undervalued Stock in the May 2006 issue.

The company ranked No. 15 in the magazine’s Top 200 survey of investment club holdings for 2010 (see the April 2011 issue). An estimated 1,152 clubs owned shares.

The company offers a dividend reinvestment and direct stock purchasing program.

Shares last underwent a stock split — 2-for-1 — in July 2000. Over the preceding 27 years, Intel’s board authorized 12 splits: six 2-for-1, five 3-for-2 and one 5-for-4.

For industry background, visit the website of the Semiconductor Industry Association and the newsroom of research company Gartner, Inc.

For localized news coverage, visit the archive of Bizjournals, the online media division of American City Business Journals. Place the company name or ticker symbol within the homepage search box.

Recent articles about Intel and its industry are available free online. To review a news story, insert the company name or article title in the search box at the homepage. Here’s a sampling:

“Intel’s Slim Bid To Revive the Notebook,” Bloomberg BusinessWeek, May 31, 2011.

“How Long Can Intel Defend Against ARM?” the Motley Fool, Nov. 11, 2011.

“The Intel We Knew and Loved Is Back,” Seeking Alpha, Nov. 7, 2011.

Commercial database services available at some libraries provide access to articles from media organizations that charge fees, require registration or otherwise restrict access to their online archives. Publications, websites and news services that have covered Intel recently and are available through such databases include the following: Barron’s, Forbes, Lab Business Week, McClatchy–Tribune Business News and the Wall Street Journal.

To request more information, contact Investor Relations, Intel Corporation, 2200 Mission College Blvd., Santa Clara, CA 95054–1549.

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