Seeking Alpha
Profile| Send Message|
( followers)  

The recent negative headlines surrounding the death of traditional PC business have impacted Intel (NASDAQ:INTC). In fact, it has also overshadowed the company's tremendous growth over the past years. Over the last 5 years, it has grown its revenues by 8% a year. This seems relatively good considering its size and scale. The strong performance is attributed to the company's strong competitive advantage in the processor business. With the proliferation of personal computing, the company was able to capture its growth fully.

On a trailing 12 months basis, it has increased by 17% compared to the same period last year. This translates to a net profit growth of 19% for the same period. The company appears to be doing well, despite the concerns that the emergence of smartphones and tablets will put a drag on the company's growth. Its nearest rival, ARM Holdings (NASDAQ:ARMH) have taken a niche on the processors of these devices. While the market believes that this is much a threat to Intel, I believe this phenomenon will provide Intel new opportunities for growth.

The Source of Intel's Competitive Advantage

Intel investors know that the source of the company's competitive advantage is attributed to its massive scale and resources. This gives the company a significant research and development advantage. It can easily invest in a certain technology that will get them at the forefront of innovation. With the most advanced manufacturing processes in the industry, it can create processors that are faster and have lower cost per unit relative to its close competitors.

According to Moore's law, the rule of thumb whereby a number of transistors that can be replaced inexpensively on an integrated circuit doubles approximately every two years. In the case of Intel, it began producing chips on the 32 nanometer circuit in the late part of 2009 and started to increase its volume on the 22 nanometer production in the second half of 2011. This translates to almost one year lead over its competitors. In contrast, Taiwan Semiconductor (NYSE:TSM) started the production of its 28 nanometer in late 2011 and started ramping up its volume this year. This is definitely longer than the average process for Intel.

Recently, it launched its third generation core processors called Ivy Bridge. It is manufactured at the 22 nanometer node and successors to its prior generation 32 nanometer Sandy Bridge processors. It also incorporates 3D Tri-Gate transistors, which is seen to complement Intel's move into smartphone and tablet processors. Its competitors have not been able to commercialize this technology.

Over the long run, tablet makers will mostly run on Intel chips. In fact, Microsoft (NASDAQ:MSFT) announced that it will go into the competitive tablet market with the launch of its Windows 8-based called Surface. The tablets will be available in two versions: Windows 8 RT version and Windows Pro Model. ARM Holdings will populate the RT Model. On other hand, Microsoft will build lightweight laptops called ultrabooks on chips from Intel.

This is timely as research firm IDC reported that PC volumes will grow by 5% in 2012. The firm said that growth will be tepid as PC's continue to struggle for growth amid intensifying competition, global political uncertainty and slower than expected economic growth.

Another indicator that it plans to move on top of the mobile market sector is its latest acquisition of over 1,700 patents and patent applications from InterDigital (NASDAQ:IDCC) for $375 million. The patents will support the company's investments in the mobile segment. It will also complement its existing strong and diverse portfolio of patents.

Other Opportunities in the Server CPU's and Cloud Computing

Intel's x86 system has a built-in ecosystem on it. It has become a dominant architecture of servers and workstations over time. I believe that this will also be the catalyst for the company's revenue growth in the future. The rise of cloud computing essentially brings the majority of computing tasks from desktops and notebooks to the cloud. With this scenario, the performance of microprocessor server is very critical. It has introduced the Cloud 2015 Vision, which will help business implement cloud computing solutions at the best possible cost.

Moving forward, I expect that Intel will continue to dominate in performance and maintain its leadership in the server realm. It has a budget of $5 billion in research and development for this year to focus on process development. It must be noted that Intel has maintained and increased its research and development budget over the last 5 years. This means that the company is committed to be at the top of the market.

Valuations

The stock is currently trading at 11 times 2012 earnings. Adjusting for net cash, the stock will trade for 10.50 times earnings. If you look at its 5 year price earnings band, the stock is trading at the low end of the range of 10 to 26 times earnings.

It also carries a dividend yield of 3.10%, higher than its average 5-year dividend yield of 2.79%. Over the last 5 years, it has grown by 14% a year. This translates to a payout of 33%. In contrast, its capital spending has grown by 12% a year. This seems big as its capital budget is already in the billions.

In contrast, its peers are trading higher. Texas Instruments (NASDAQ:TXN) trades at 18 times earnings and ARM Holdings is valued at 50 times earnings. Given the strong positive tailwinds that the company is facing, the market has not fully appreciated the company.

While there are no near term catalysts for the stock price, I believe that the strong earnings growth in the succeeding quarters will be the main catalyst. The current uncertain environment will provide investors opportunity to invest in this market leader at bargain prices. For the meantime, current and prospective investors will be glad to know that they will be handsomely rewarded with dividends before the stock price moves up.

Source: Intel Will Dominate In 'Smartphone' Era