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Author: alan81 Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 20304  
Subject: Re: INTC: Value stock? Date: 11/18/2012 2:34 PM
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Staying a leader (if not THE leader) in the industry?
.....who can replace them .. certainly not AMD
We need to start out by defining "the industry" that Intel is in, as there is some disagreement on that. If you look at their website and you look at their history, and you look at what they say it is clear to me that the industry they are in is "semiconductor manufacturing". So, we would need to compare them to other "semiconductor manufacturers". This rules out companies like ARMH, AMD, QCOM, nvidia, and AAPL. If we narrow semiconductors down to "logic" as opposed to DRAM and Flash we see the primary competitors as Global Foundries (the old AMD factories), TSMC, and Samsung. IBM and TI have historically been on that list, but have been "run over" by Intel or others.

The perception of some (including Denny) is that X86 is the moat. I believe the moat has switched and become the underlying manufacturing technology. Each new generation of manufacturing technology provides three benefits: reduced power, increased performance, and lower cost. All of those are as important, if not more important, to the phone and tablet market as they are to the PC market. We see this effect in the iPhone product. The original iPhone has a cost to Apple of around $250, while the new iPhone 5 is closer to $200... with much higher performance. Speaking of the iPhone, looking at the players and cost sheds some light on the value chain.
ARM provides the cpu design for both the baseband chip and the application processor. Annual ARM revenue is $0.76B. Imagination technologies ($.128B annual revenue) provides the GPU design for the applications processor. Qualcomm integrates an ARM core with Qualcomm IP and has TSMC build the baseband chip. Qualcom annual revenue is $19B, and TSMC is around $14B. Apple integrates an ARM CPU with the GPU, and additional Apple IP and has samsung manufacture the Ax chip for the phone. For the $600 iPhone apple gets $400, qualcomm gets about $35 which TSMC gets part and ARM gets part. Samsung gets around $17. The various other suppliers and assemblers get the remaining $150 or so... very rough numbers but it is clear this is not a really stable situation and it is unclear how it will evolve.

Its 10 year financial safety?
The first question I ask here is what is happening to the overall semiconductor market that Intel serves? Today they are about $50B, with most of that revenue coming from the PC at $100/unit times 400Mu/year.
If we look at the phone market the applications processor is about $15 but ships close to 2Bu/year for potential revenue of $30B, still shy of what INTC makes on the PC market even if they garner 100% of the market. This makes things look pretty risky for Intel unless you assume the existing PC market at least stays stable.

If we ask a different question though we get a different answer. What is happening with the worldwide demand for compute capacity? I think the answer is that it is going up, but the form factors it is delivered in is changing. Intel has a semiconductor capital manufacturing base of about $27B, with an annual capital expenditure of around $11B. TSMC has an installed based of about $14B and capital spending at $7B/year. It seems Intel is one of the few positioned with factory capacity to meet the worlds demand for compute capacity, and that is not going to change very fast.

A worst case scenario is to assume all Intel IP is of no value. TSMC makes $14B/year on a capital base of $14B (approximately). This means INTC revenue would bottom at their capital base or $30B versus the current $50B. I really don't see that happening, but would consider it the worst possible outcome.

How do you rate it's value right now?
...... entry price?

Given their silicon manufacturing technology lead, Intel can sell silicon at TSMC cost, and still make about 30% margin (versus current margin of above 60%). The stock is significantly discounted (4.4% dividend yield, PE of 9) due to a reduction of revenue in the current transition. It is clear to me that the current down trend is not permanent, nor even sustainable. The questions remain about how low it will go, and when will it turn.

Other investment considerations?
In the value chain for mobile devices I really like Qualcomm.

As a final note on the underlying silicon technologies, we hear lots of buzz words like 3d transistors and "high K, metal gate". These technologies typically take over 10 years from first conception until you buy them in some product or other. Staying on the leading edge here is so expensive companies started combining efforts, and still failed. I really don't see how Intel can NOT be the dominant silicon in future computing devices. With a ten year or more lead time on developing the underlying technologies it substantially rules out new players.

Alan
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