Intel (INTC) Analyst: Brian von Hein Jr. Fall Recommendation: SELL Target Price until (12/31/2015): $24.46

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1 Recommendation: SELL Target Price until (12/31/2015): $ Reasons for the Recommendation Intel has been the markets leader in microprocessors for personal computers over the last decade. The industry has seen some rapid changes over the last few years, starting with the change from the desktops to laptops and now laptops to tablets, ultra books and smartphones. Intel s chips worked a lot better in the products that were plugged into the wall more often and did not have to worry as much about power consumption but they are finally entering into the mobile part of the industry. They are entering in with the power of their 4G LTE modems. Intel s stock has risen over the year with the anticipation of their improved microprocessors. One of the roadblocks holding Intel back from the mobile market was their lack of 4G LTE support. They were not able to integrate it previously as their previous technology was already using too much power killing the battery life. On October 1 st Mike Williams wrote an article about the battery life in smartphones, comparing the lack of battery life to the advances in the technology. He talks about how each additional feature on the phones restricts the battery life 1. This is one of the factors that had been holding back Intel s business. The main points of Mr. Williams article is that instead of adding to battery life we are able to add additional features to the phones without restricting the battery. For Intel the next step is adding in 4G LTE support to its chips. This is by way of Intel s XMM 7160 modem 2. This data modem allows for their smartphones and tablets to support 4G LTE coverage. Intel has decided how it is going to use its excess capacity. During their Investor Meeting on November 21, 2013 Intel talked about how they would listen to business propositions from other companies about Intel s excess manufacturing capacity 3. This was one of several takeaways from this event that resulted in a two and a half percent gain the day it was announced, followed by a five percent loss in Intel s stock price the next day. The expanded contract manufacturing is a give and take for Intel. They will gain revenue from utilizing more capacity, which would increase its earnings per share. The downside to this is that they are helping their competitors make better chips cutting into their own products market share. One intriguing possibility is if Apple has Intel start manufacturing chips for Apple based on ARM designs 4. This possibility would allow for Intel to manufacture chips for a leader in the mobility industry. Apple hasn t gone with Intel in the past because there have been more flexible options that Apple prefers. They want the option of having different people designing and manufacturing. I believe that the stock price is overvalued right now. The market is overvaluing Intel s next generation of products. Their next generation is supposed to be what breaks them into the market for mobile devices. During the Investor Meeting they talked about how they are going to be giving away chips in order to win some market share 5. This shows how desperate Intel is to get into the industry. With the losses in the PC client group due to lower PC sales in combination with the chips being given away there will be lower revenue and decreased margins. I believe that the PE going forward should be $12 going forward, which is higher than the past three years ($10.30, $9.22, $11.66), but lower than $12.88 trailing twelve month

2 PE. Factoring in this PE with a forecast of flat earnings in 2014 and marginal increases in 2015 there would be only an approximate two and a half percent gain in the stock price over the next two years.

3 2. Company Analysis Intel has had many things going for it over the last couple of decades in the computer market. Over the last few years that has begun to change. Over the last few years people have started to want to buy things cheaper and look for more values. That started the trend for customers to buy different, more mobile, types of electronics for their computing needs. Intel has tried to work through the change while keeping the same quality chip in each product that it produces. Intel s biggest strength has been its commitment to its research and development. Without spending the money to make the best products possible there can be no product that will live up to expectations. There would be no new improvements or special innovations. The large research and development has allowed Intel to remain competitive. The research and development did not stay ahead of the curve for the mobile transition but it has allowed Intel to still be competitive. Intel s major weakness is its underutilized capacity. They have not been manufacturing much as in the past because of the declining PC industry and it has left them with a lot of capacity that is wasted spaced. This is a large amount of fixed cost that could be split up among more products if they had been manufacturing more products. If they had done this they could have improved the bottom line and been a more profitable company. This weakness presents an opportunity that Intel has announced that it will open its doors for. These opportunities are manufacturing products for other companies with their excess capacity. The opportunity would allow Intel to prove to other companies that they are able to produce the products needed to compete in the more mobile business. This would also allow Intel to pick up some profits in a market share that it does not currently have, even if it helps its competitors along the way. A threat of Intel is its business model. There are companies that do just chip manufacturing and companies that will sell the designs for the chips. This added level of competition makes it easier for their customers to shop around for better deals and to see if they do one part of it maybe they could save some money. Since the companies are separate the company that is doing the manufacturing doesn t have to worry about people to design the chips just the specialty people that make the chips and could be more efficient. The same goes for the other companies that would only have to focus on how the chip should be designed. This allows for an increase in efficiency. Companies can also do the manufacturing or design themselves and not outsource the microprocessors at all. Intel s future success depends on them being able to capitalize on all their research to provide the best products. They need the research to pay off to take advantage of the opportunities in smartphones and tablets. They also need to make sure that if doing the design and manufacturing are the more effective way to go forward or if they need to rent out manufacturing or just sell designs.

4 3. Industry Analysis Intel has had to change its outlook with regards to the products that it needs to develop. The PC industry has stalled and taken huge losses to the growing tablet and smartphone industries. Intel has been trying to play from behind in that area. Intel s other main revenue source is its Data Center Group which has been able to counter the losses it has taken in the PC Client Group. If Intel cannot take a controlling hand in the mobile microprocessor industry then the Data center will not be able to cover the losses the PC industry has taken. The industry outlook for microprocessors is fairly grim in the desktop edition. For that reason Intel is trying to be more relevant in the tablet and smartphone industries. The microprocessors are one of the things that make the devices run and determine how fast they are able to run. In converting from typical desktop to more mobile devices the amount of power each of them drained from the battery has suddenly become relevant. The desktops were plugged into a power supply the whole time they were on and so energy consumption was not an issue. If someone is to take something on the go it needs to have enough battery life to last until they arrive back home without having it die. Intel is working from behind trying to catch up to its competitors, mainly ARM. ARM took control of the industry by just designing the chips. They left the manufacturing of the chips up to different companies, like Texas Instruments or the company itself. Since Intel has taken the backseat in the new microprocessors segment it has hindered its business. They have lost overall market share with this movement to these devices even though they have maintained a strong hold on the PC microprocessors. Through the PC industry they have developed relationships with the computer manufacturers allowing for them to remain on the top of the industry for a long time. With the transition to more mobile devices they are trying to break through after Arm took control of the industry with its newer, more specialized business model. Now Intel is on the outside looking in trying to convince the hardware companies that they should switch from their current products to ones that include the Intel chips in them. Intel is also involved in the Data Center Group which has been taking off for them in recent years. The data center group is involved with the computer systems for the cloud as well as big data analysis. Intel is pushing hard into the industry. The data center helps with on-demand and streaming services. The better equipment the better quality that will be delivered. The micro servers that Intel produces are helping many different companies across a variety of industries. These products are involved in some of the longterm trends looked at for the Regents portfolio. They are used mainly in conjunction with Big Data. This trend has provided great revenue for taking data and analyzing it. The major hurdles for this industry have been its lacking overseas needs. It has had huge growth in the United States but has not had the same growth internationally. Intel s name and quality are enough for some of the smartphone and tablet manufacturers to use them in their designs but in this case it is too late for Intel. ARM has a strong grip on the industry and works has a much different approach to the market that has allowed the manufacturers to have the flexibility of just buying the chip design. This has allowed companies like Apple to have the chips manufactured in their names. Intel has great challenges to overcome to be the same dominate force in the tablet and smartphone industries that it has been in the computer industries.

5 Appendix: Inputs into valuation using multiples Year Stock Price $ $ $ $ $ $ $ Diluted EPS $ 0.77 $ 2.01 $ 2.39 $ 2.13 $ 1.92 $ 1.96 $ 2.04 Sales $ 35, $ 43, $ 53, $ 53, $ 52, $ 53, $ 55, P/E $ $ $ 9.22 $ $ $ $ P/S $ 2.75 $ 2.71 $ 2.21 $ 2.41 $ 2.23 $ 2.23 $ 2.23 * Analyst's own calculations. Source of basic data: company's 10-K; Yahoo! Finance