INTC Valuation Model

M. J. NEELEY SCHOOL OF BUSINESS EDUCATIONAL INVESTMENT FUND SUMMER 2015 RUSSELL NAUMANN AND VARUN GADIA INTEL CORPORATION

BUY SUMMARY COMPANY NAME

INTEL CORPORATION

TICKER

INTC

SECTOR

TECHNOLOGY

INDUSTRY

SEMI AND SEMICONDUCTOR EQUIPMENT

CLASSIFICATION

INCOME AND CAPITAL APPRECIATION

RECENT PRICE

$32.73

52 WEEK PRICE RANGE

$37.67 - $27.60

OVERALL NUMBER OF SHARES

11704 MILLION

MARKET CAPITALISATION

$155271 MILLION

CURRENT P/E

13.90x

FY 2017 P/E

14.25x

FY 2014 EPS

$2.39

FY 2017 EPS

$2.88

3 YEARS GROWTH RATE (2014-2017)

10.11%

CREDIT RATING (STANDARD AND POOR)

A+

Z– SCORE

5.25

CURRENT DIVIDEND YEILD

2.93%

FY 2018 DIVIDEND YEILD

2.76%

CURRENT DIVIDEND PAYOUT RATIO

37.69%

FY 2017 DIVIDEND PAYOUT RATIO

39.28%

BETA

.89

CURRENT P/B

2.78x

INTEL CORPORATION VALUATION (SUMMER 2015) 1

PROS

CONS



GROWING AND THRIVING MOORE’S LAW



HIGH US DOLLAR



GROWING IT AND DATA CENTER BUSINESS



SLOWING JAPAN AND CHINA



DIVERSIFIED PORTFOLIO



SLOWING WORLWIDE PC BUSINESS



IN-HOUSE MANUFACTURING



BROKEN MOBILE BUSINESS



TAX BENEFITS



COMPLEX OEM AND ODM RELATIONSHIPS



HIGH ROE, VALUE THROUGH DDM AND FCFE



DELAYED ALTERA BENEFITS

PORTERS FIVE FORCES THREAT OF COMPETITION

HIGH

THREAT OF NEW ENTRANTS

LOW

THREAT OF SUBSTITUTES

LOW

POWER OF SUPPLIERS

LOW

POWER OF BUYERS

MODERATE

COMPANY OVERVIEW

Intel Corporation designs, manufactures, and sells components and related products. 1 The company’s major products include microprocessors, chipsets, embedded processors, microcontrollers, flash memory products, graphics products, communication products, system management services.1 In 1968, two scientist Robert Noyce and Gordon Moore, founded Intel with a vision for semiconductor products. In 1971 they introduced the worlds first semiconductor product. 45 years later, Intel is the largest semiconductor manufacturing company in the world, both by innovation— licensing and patents, and by market capitalization. Headquartered in Santa Clara, California, Intel had 106,700 employees at the end of 2014.2 55% of the company’s employees reside in the United States and 82% of the company’s revenues are obtained from International Operations.

The company continues to enhance its products’ performance and reduce costs by using Moore’s law, which it conceived during its inception. The company operates out of 5 major segments, PC, Data Center, Internet of Things, Communications, and Other—such as Netbook, and Flash Memory.3

1 Bloomberg; 2www..intel.com 3www.intc.com

INTEL CORPORATION VALUATION (SUMMER 2015) 2

PORTFOLIO CONSIDERATIONS

In the spring of 2015, the EIF decided to maintain the technology sector allocation at an S&P weight around 19.7%. We currently own 5 stocks in the technology sector, which are Qualcomm in the communications equipment space; Apple in the computer hardware space, Cognizant and Google in the IT Services and Consulting space, and Oracle in the software space.

We currently own no stock in the electrical equipment, semiconductor and semiconductor equipment space. Most market leading companies in the electrical equipment space are located outside the United States. Hence, to obtain complete diversification of our portfolio in relation to our benchmarks such as the Vanguard Balanced Index fund, a large cap semiconductor company would be beneficial.

In the semiconductor space, among multiple options such as Micron Technologies, Analog Devices, Texas Instruments, NVidia, and Corning Incorporated, we felt Intel provided a high dividend yield, potential value upside with stable cash flows, diverse product mix, and proficient management.

Looking at co-relations with our current holdings, the SPX, and XLK, we believe that Intel has a low correlation compared to its peers, the SPX, and XLK. The low correlation provided by INTC provides the diversification we need to our portfolio, and helps cover the uncovered segment in the technology sector.

INTC

SPX

XLK

QCOM

AAPL

GOOGL

ORCL

INTC

1.000

SPX

.513

1.000

XLK

.582

.888

1.000

QCOM

.335

.496

.526

1.000

AAPL

.211

.398

.592

.229

1.000

GOOGL

.261

.574

.639

.279

.224

1.000

ORCL

.340

.581

.632

.303

.239

.3335

1.000

CTSH

.261

.5541

.539

.288

.223

.286

.383

CTSH

1.000

INTEL CORPORATION VALUATION (SUMMER 2015) 3

COMPANY

CLASSIFICATION

DATE OF CURRENT PRICE PERIOD RETURN YTD RETURN PURCHASE

INTC

Income and Capital Appreciation

-

SPX

-

XLK

$32.73

-

-5.04%

-

-

2.36%

-

-

-

4.89%

QCOM

Income and Capital Appreciation

2/18/2011

$68.90

26.7%

-6.1%

AAPL

Capital Appreciation

10/24/2008

$129.36

900.2%

18.1%

GOOGL

Capital Appreciation

2/15/2012

$551.69

82%

4%

ORCL

Capital Appreciation

3/21/2007

$43.77

156.4%

-2.1%

CTSH

Capital Appreciation

11/13/2013

$64.47

38.9%

22.4%

After a strong run in 2014, INTC has dropped by about 5.04% in value primarily due to lower than earlier guided Q1 earnings, and lowered FY 2015 revenue guidance. The semiconductor and semiconductor industry has performed lower in 2015, compared to remaining technology sector because of lowered guidance regarding PC demand, the largest customer for chips.

We feel that the current price of the stock presents us with a strong entry point, considering the future growth potential of the company.

INDUSTRY OVERVIEW

Intel operates under the semiconductor and semiconductor equipment industry. This industry manufacturers electronic components as a compact discrete chip with two or more connecting metallic pads. Typically the semiconductor material that becomes a conductive circuit of electricity is made of silica. Semiconductors enable all electronics such as smartphones, tablets, PCs, cars, planes, and medical devices—everything with an on and off switch.4 Due to the diverse number of industries that rely on semiconductor equipment, the production and performance of the semiconductor industry is a forerunner to global economic growth. Over the last 25 years, the contribution to the U.S. economy by the semiconductor industry has grown more than any other major U.S. manufacturing industry.4

4 PWC

Report;

INTEL CORPORATION VALUATION (SUMMER 2015) 4

Industry Life Cycle: Growth Stage

The semiconductor industry is currently in the growth stage of the industry life cycle. Reasons for this phase are the dramatic technological changes in the industry supported by high levels of R&D, product innovation still being amidst the goals of industry leaders, and the flourishing demand for application based electronic devices.5 Current Performance Application based technologies in all different types of industries continue to increase in sales, thus the demand for semiconductor equipment. The industry has experienced some revenue volatility in the past as some consumers have been postponing electronic purchases due to price decreases, but sales stability has become intact in recent years.5 As the number of global internet users continue to increase and disposable income continues to boost, the semiconductor industry revenue is expected to grow 1.9% in 2015 alone.5 To keep up with this growing demand, global semiconductor production needs to increase overall to meet demand.

Growth Factors and Trends The semiconductor industry is fairly correlated with the performance of global GDP, therefore there are many macroeconomic factors that affect growth. It is important to realize that semiconductor sales depend on the sales of thousands of different types of electronic equipment from consumer electronics to aerospace equipment. Three important application based technologies affecting the semiconductor industry are automotive, consumer electronics, and telecommunication. In the automotive industry, semiconductor sales in the BRIC nations continue to be a driving force of growth throughout the industry.4 The most current influential nation to the semiconductor industry is China, with a 30% increase in vehicle sales from 2010-2015.4 In order to build market share in today’s economy, semiconductor manufactures need to focus on markets with very high growth potential in automotive and industrial sectors.

Vehicle Sales in BRIC Nations 2005-2014 (units) Sales in Units

25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 -

2005

2006

2007 Russia

5 IBIS

2008

2009

India

Brazil

2010

2011

2012

2013

2014

China

World; 4 PWC Report

INTEL CORPORATION VALUATION (SUMMER 2015) 5

Another trend influencing semiconductor sales is the consumer electronics industry, comprised of tablets, personal computers, cameras, and other personal devices. The growing popularity and thrusting sales in tablet devices has posed a threat to the sales of personal computers. Although these devices do require semiconductor usage, it is at a lesser semiconductor per unit rate than personal computers.5 With the growing number of mobile telephone subscriptions around the globe, the cannibalization of PC computers by smartphones also pose as a hazard to semiconductor profitability. The market for display components has been accelerating in recent years due to the increasing demand for liquid crystal displays (LCD) found in portable computers, desktop monitors and other handheld application electronics.5

From a macroeconomic standpoint, upcoming sales forecasts for semiconductors are precarious due to the fragile state of the global economy particularly in the Eurozone, China, and Russia.

A leading factor for North Asia pulling in most of the revenue for the industry is the shift in final

product manufacturing from developed countries such as the United States to low-cost countries in Asia.5 Consumption in China for semiconductor revenues accounts for more than 40%, and is expected to reach up to 50% by the end of 2015.4 As China remains the leading revenue generator of the semiconductor market, their economic stability may uproot a threat to industry sales.

5 IBIS

World; 4PWC Report

INTEL CORPORATION VALUATION (SUMMER 2015) 6

Other critical drivers of sales growth in the semiconductor industry are disposable income by consumers and personal consumption expenditures which have risen 22.5% and 7.8% respectively since the end of the financial crisis.6 An important factor that will continue this trend will be the unemployment level, currently 5.5%, and still expected to end low swinging through 2016. 5

Risk Factors To asses the risk of the semiconductor industry, IBIS world provides a total risk score based on structural risk, growth risk, and sensitivity risk to achieve a score of 5.04 out of 8.

Structural risk pertains to the overall Risk Component risk of the semiconductor industry.

Structural Risk

The main structural risk driver is the fragile state of the global economy, Growth Risk due to the strong correlation between Sensitivity Risk industry performance and global Overall Risk GDP.

Weight

Score

25%

6.5

25%

4.45

50%

4.61 5.04

The global economy’s fragile state, revenue volatility associated with changing demand, and exposure to exchange rate risk in foreign markets puts structural risk on the upper end of the scale at 6.5. structural risk is rated on the upper end of the scale at 6.5.

1 Federal

Reserve Bank of St. Louis;

INTEL CORPORATION VALUATION (SUMMER 2015) 7

Growth risk is expected to be medium in upcoming years. The amount of application based electronic devices is constantly expanding around the world, and is expected to continue as more users around the globe have internet access.

Other semiconductor based technologies are constantly being innovated while requiring more semiconductors per unit, such as in automobiles, commercial aircrafts, and telecommunication.

A risk bringing this growth score down is cannibalization of some products by those that require less semiconductors per unit such as handheld tablets.5 Sensitivity risk is forecasted to me medium-low over the outlook period. Primary drivers of this estimate include the private investment by firms in computers and software, and import penetration in the manufacturing sector.

Import penetration increases when U.S. consumers and businesses purchase more foreign-made products in order to take a cost competitive advantage.

This import penetration will cause sensitivity risk to increase, while private investment will cause a decrease.5 Changes in Demand— Changes in product demand are difficult to predict in this industry, and can cause detriment to financial results. Threat of new products by competitors and technology products maturing in their life cycle can cause price volatility and abrupt changes in demand.3

5 IBIS

World

INTEL CORPORATION VALUATION (SUMMER 2015) 8

Since this industry is highly competitive, it is important for firms to stay tuned to technological advances and changes in market demand quickly in order for their supply chain to adapt.3 Licensing Enforcement—It is vital for all technology companies to be able to effectively enforce patents, copyrights, and software licenses in order to avoid costly lawsuits and unfair competition in the marketplace. 6 Sales to Government Entities— Government demand for semiconductor products can change unexpectedly based on budgetary restrictions and cycles. Government contracts are also exposed to intensive oversight on rules for accounting, reviews, and security.3 Global Economic Stability—Since the semiconductor and semiconductor manufacturing industry is very dependent on global GDP growth, the main risks lie in the economic instability in Greece, Ireland, Italy and other European nations. Changes in consumer confidence can also influence revenue streams as the final value of many semiconductor products rely on consumer demand.3

3www.intc.com

INTEL CORPORATION VALUATION (SUMMER 2015) 9

COMPETITORS

Qualcomm1: Qualcomm is located in San Diego, California and has a strong presence in the communications equipment segment. The company pioneered the Code Division Multiple Access (CDMA) technology used in digital wireless communication equipment and satellite ground stations primarily in North America. The company derives most of its revenues through sales and marketing of semiconductor equipment and system software based on CDMA and other technologies. The company also generates revenue from licensing its CDMA and orthogonal frequency division multiplexing access technology.2 Qualcomm is an especially close competitor to Intel in the mobile communications space. As a mobile communication leader, Qualcomm has been the premier company to partner with for various OEM and ODM manufacturers.

Texas Instruments1: Texas Instruments, out of Dallas, Texas, has a formidable and inception related presence in the analog semiconductors equipment segment. The company pioneered technologies that change real world signals such as sounds and images into digital data streams. The company makes embedded processors that can process data from analog chips and handle specific tasks in electronic devices.

The company generates most of it’s sales from the APAC region.

AMD1: Located in Sunnyvale, California, AMD has been Intel’s major competitor over many years. The company ranks #2 in the PC and server microprocessors far behind its arch rival, Intel. AMD has slowly and steadily eroded Intel’s market through the popularity of its cheap and high performance chips, suitable for the consumer market. The company generates most of its revenues from graphics, media, and video applications. Most of AMD’s sales come from international customers located in the APAC region, and China, contributing to nearly half of its earnings.

NVIDIA1: NVIDIA is located out of Santa Clara, California. The company pioneered the Graphics Processing Unit (GPU) to design high performance chips .

NVIDIA’s chips are complementary products used along with Intel and AMD processors. The company designs, develops, and markets three dimensional graphics processors and related software. The company provides products primarily to the mainstream personal computer market, and secondarily to netbooks, tablets, and mobile phones. Most 7

Hoovers.com; 1Bloomberg

INTEL CORPORATION VALUATION (SUMMER 2015) 10

of the company’s revenues are from the APAC region, and Taiwan, contributing 67.4% to the overall sales.

Samsung Electronics7—Samsung is a company located out of Seocho-gu, Korea, Republic of South Korea. It is one of the worlds largest semiconductor manufacturers along with other electronic and computer hardware. Samsung manufacturers RAM, application processors, and foundry solutions. Samsung revenues are primarily derived from OEM and ODM manufacturers located in the APAC region.

Looking at the semiconductor industry by market share based on products sold verses revenue, we see that Intel leads in terms of market share compared to its competitors. This is primarily due to Intel’s diversified product offerings.1 The market share compares companies across a variety of segments with the semiconductor space including computing, wireless communication, consumer products, industrial, energy, medical and military products, automotive products, and wired communication. Although Intel leads within the computing space, the wireless space leader is Qualcomm, the consumer products leader is Samsung, the industrial, energy, medical, and automotive space is Texas Instruments, the automotive leader is Renesas Electronics, and the wired communication leader is shared by Texas Instruments and Intel.

7

Hoovers.com; 1Bloomberg

INTEL CORPORATION VALUATION (SUMMER 2015) 11

PORTERS FIVE FORCES

Threat of Competition- High: The semiconductor industry has been well established over the years, the processes are well defined, and the industry can be said to be in the growth stage. Companies differ from each other by their product offerings primarily driven through high research and development costs and licensing on ongoing technologies. Due to the number of competitors in the industry, the competition ranges from price to performance across various segments. Competition driven on performance may be moderate, but competition based on price is fierce and rapidly growing. Companies have positioned themselves to lower costs of production, and tax benefits that have helped them uniquely market their products. Competition over the long-term decreases, but in the near term due to ongoing developments in the wireless, internet of things and flash memory (Categorized in Intel among “all other�) segments are fierce.

The diagram above represents the number of competitors across key segments within the industry. 3 Threat of New Entrants - Low: Competitors have established themselves well, and the industry is saturated across various segments. The industry is capital intensive and requires huge startup costs.

New entrants can enter the market by positioning themselves differently against the existing players or by targeting an untapped geographical segment. While the number of new opportunities is lower than in the past decades, and existing players are global in their operations, new entrants will find it very difficult to enter this market.

Threat of Substitutes - Low: Computer chips have seen new developments almost every two years, and continue to develop by reduction in size, increase in performance, and decrease in costs. Due to the uniqueness of the products available in the market, we see no alternatives to chips at least for the next decade. Some companies, such as IBM, have cited alternatives to chips by using nanotubes.

They also cited, however, that the technology will take a decade to be developed.8 3

Intc.com 2nytimes.com

INTEL CORPORATION VALUATION (SUMMER 2015) 12

Power of Suppliers: Low - The industry can interact with suppliers in various ways. Some companies manufacture their own chips, while some companies design and market their chips, then outsource their manufacturers operations. Intel manufactures it’s own silicon in its foundry business based out of Arizona. The company sources materials, equipment, and services. Various industry operators work with their suppliers to implement process improvements wherever necessary. Companies usually desire generic offerings from their suppliers to diversify risk, then create action plans to reduce risk exposure in cases in which they cannot diversify their disruption in supply.

A good measure to judge supplier risk is to see the exposure the company has in relation to its top suppliers and whether those suppliers have had any unfavorable sales surprises - supply side risks.1

If we only look at the top suppliers that represent 61.78% of the company’s suppliers, we conclude that Intel’s overall sales surprise is positive. A positive sales surprise is good for the company and represents lower supplier risk.

Power of Buyers: Moderate - The semiconductor business is a primarily a business to business market. Semiconductor manufacturers sell primarily to manufacturers of products such as personal computers, servers, mobiles, and wearable devices. Those manufacturers then sell their products to retail consumers. Companies select a particular semiconductor company based either on performance or cost. During the initial selection stages, the competition may be intense with various companies offering a variety of products such as the wireless communication space. In the later stages of the established relationship, companies continue the relationship with the existing semiconductor company until the lifetime of the product. Hence, although buyers seem to have power in the short term, the long term power rests with the semiconductor company.

1

Bloomberg

INTEL CORPORATION VALUATION (SUMMER 2015) 13

FIRM OVERVIEW AND SEGMENTS

Intel designs, develops, and markets integrated platforms, which consists of a microprocessor, and a chipset. Platforms may have enhancement services such as accelerators, that can be either hardware or software based. Intel’s platforms are used to deliver a wide variety of products such as personal computers, notebooks, netbooks, data centers, wearable devices and wireless communication devices.7 Intel was established in 1965 by Gordon Moore, FY 2015 is the 50th anniversary of the company.

Gordon Moore determined in 1965 that microprocessors would regularly get more powerful, smaller, and less expensive. The company used Moore’s law and captured 80% of the semiconductor market share in the last few decades. The company has 150 locations all over the world with assembly and test facilities in Costa Rica, China, Malaysia, and Vietnam.3 To continue strategic investments, increase performance, and reduce costs, Intel has partnered with various companies. These include IM Flash Technologies to manufacture NAND flash memory products, Cloudera for big data analytics, and Intel-GE Care Innovations in the healthcare industry.

The company’s strategic vision focuses on constantly promoting Moore’s law, increasing it’s service offerings and shared integrated platforms.

The company’s key working segments are the PC Client Group, Data Center Group, Internet of Things Group, Software and Software Services, Mobile Communications, and Others - such as Non Volatile Memory, Corporate, Foundry.

PC Client Group3 - This group is the largest and oldest group in the company. It includes personal computers, netbooks, and 2 in 1 systems. The company continues to innovate and drive revenue within the group by offering performance intensive technologies such as 14nm chips, In Millions of USD and 5th generation Intel core processors that are energy efficient, cost effective and improve performance. In 2014 the group revenues grew in the mid single digits and significantly drove up the firm’s revenues.

Data Center Group1 - The Data Center group is the fastest growing and the most robust segment. The group offers products for all server, network and storage platforms. The group services platforms such as enterprise, cloud, communications infrastructure, and technical computing segments. The company launched its high performing Xeon processor E7 family based on 22nm technology to service the needs of this group in 2014. These products have 4 or more CPU’s delivering high performance. The Xeon Phi processor that contains 60 or more high 3

Intc.com 7Hoovers.com

INTEL CORPORATION VALUATION (SUMMER 2015) 14

performance, low power processor cores services the world’s most advanced supercomputers. The group had superior performance in 2014, growing in the mid double digits and is poised to continue similar growth in years to come.

Internet of Things Group3 - The Internet of Things (IoT) group offers platforms for customers to design products for the retail, transportation, industrial, and home market segments. The group designs products that provide end to end customizable solutions for customers. In 2014 the group developed the 32 bit Intel Quark processor to service the needs of its clients. Internet of Things aims to develop products designed to empower the next generation wearables, robotics, and other devices to connect, create, and consume data. Intel believes that IoT will revolutionize the way people use technology and invest heavily to be the leading player among its competitors. In 2014 the group grew in the higher double digits, and Intel gained substantial market share within the segment.

Mobile and Communications Group3 - The mobile and communications group offers products that incorporate hardware and software for tablets, smartphones, and other mobile devices. The group has a wide variety of products to service the WiFi, 2G, 3G, and 4G LTE technologies. It focused on developing average performance, low cost products for its customers. In 2014, Intel developed the Intel Atom - “SoFIA”, to service the needs of 3G customers. This particular group has been a problem for Intel due to In Millions of USD the company missing the mobile boom, where it lost significant market share relative to its peers. In 2014 Intel, subsidized its products to gain market share and bring its technologies and products to the market. Intel lost significant revenues due to the subsides, but is continuing to invest to offer low cost products to its customers. Moreover, the company has started tapering the subsidies to reduce its losses within the segment.

Software and Software Services Group3 - This unique group seeks to diversify Intel’s hardware focus to a much more differentiated customer experience. Its initiatives are to enable platforms that can be used across multiple operating systems, applications, and services. These platforms optimize features and performance by enabling software ecosystems to quickly take advantage of new platform features and capabilities. They also enable a more secure online experience by using software, services, and hardware to deliver solutions such as McAfee antivirus (McAfee LifeSafe).

3

Intc.com

INTEL CORPORATION VALUATION (SUMMER 2015) 15

GROWTH DRIVERS

Moore’s Law: Gordon Moore’s law stated that the number of transistors in a dense integrated circuit will double approximately every two years. The doubling of transistors may not have held true over the years, but the increase in performance and reduction in costs every two years has held true.

Intel uses a “Tick Tock” development cycle. “Tick” stands for manufacturing, process, technology, and design. “Tock” stands for microarchitectures, development, testing, and shipment. Intel is in the process improvements stages of the 14nm technology, is in the tock stage of the 10nm technology, and will begin the tick stage of the 7nm technology in the 2015-2016.

Intel is far ahead of its peers and stands to benefit from the technology improvements across its various segments. The increase in performance will help the company capture market share in the Internet of Things and Wireless communications segment.

Whenever Intel develops a new technology, the cost per transistor decreases, that helps drive capital growth. The curve shown in the figure above shows the benefit derived from each added technology 3

Intc.com - All Charts

INTEL CORPORATION VALUATION (SUMMER 2015) 16

Research and Development Expenditures: The company’s research and development expenditure spending is directed toward delivering solutions consisting of hardware and software platforms supporting services across a wide range of computing activities. Intel is developing a new architecture known as “Skylake” to support its 14nm processor technology and is expected to be released in the second half of 2014. The company is making significant expenditures into Cloudera to support its big data analytics portfolio.

Compared to its close competitors, Intel is investing almost twice as much into research and development. History has shown that by large R&D investments into the right focus areas will drive increased revenues in the mid to long term. Due to these reasons, Intel will see sustained growth in its already leading segments, its upcoming segments, and its underperforming segments. Intel may have missed the mobile boom, but by sustained and streamlined investments the company can quickly match pace with its competitors and reduce its losses. Management estimates around a $800 million reduction in operating losses in the mobile communications group in 2015 and continued decrease in losses in the years to come.

Cross Platform IP Sharing and Innovation: Intel expects to utilize integrated products developed for one platform over its entire portfolio. For example, a service that is developed for the PC Client Group can easily be integrated to use within the Internet of Things group. Intel sees this so a customer can offer products powered by Intel processors across its variety of product offerings that can create a streamlined performance across various services. The idea helps enterprise customers that desire a similar level of performance across all their products. In this way Intel can capture customers at various end points, and retain them by cross selling various products in lieu of consistent performance benefits.

3

Intc.com

INTEL CORPORATION VALUATION (SUMMER 2015) 17

Data Center Group - The company expects robust revenues in the Data Center group. The group’s growth is a fairly new addition to the company’s portfolio. Various growth drivers for the group are the increasing amount of connected devices, increasing number of connected services, rising need for cloud services, increasing need for technology efficiency, and higher rate for technology consumption. The newfound growth calls for an increase in performance and new architecture. Intel is a leader in servicing the groups requirements and is continuing to do so through heavy R&D expenditures.

The Data Center group is expected to grow at an annualized rate of 15% based on management guidance. Using a conservative revenue guidance, we expect the group revenue will rise from $14 billion to $22 billion by 2018, making it the second largest group in the Intel portfolio and a few years away to match revenues of the PC Client group.3 This will help Intel achieve the diversification it aims to steer away from PC Clients to other services.

The difference between Intel and its competitors in the Data Center group is that Intel has leadership across server, storage, and network platforms by market share and revenues. Intel has customized products, and owns the historic ecosystems and environments in which the company operates.10 Industry Consolidation - The semiconductor industry has struggled in the years post recession. The company faces challenges such as soft world economic environment, pricing pressures, heavy investments in research and development, highly displaced and individualized manufacturing processes and networks, fairly similar products, and short product life cycles.2 Hence, the industry struggles with a higher distress level than ever before, with 53% of the companies in the sector.2 Moreover, opportunities to gain market share - horizontal expansion - in the industry are fairly limited, with players having existing relationships with their current partners. The only way the industry can expand horizontally is through mergers and acquisitions.

The latest trends have shown the acquisition of Broadcomm by Avago Technologies, and by Altera

by Intel Corporation.

Lower Tax Rate11 - Intel has always seen a lower tax rate compared to other technology firms. The reason for the lower tax rate is due to the revenues the company earns across various jurisdictions, and the research and development tax credit given to the company. Intel is expected to have a tax rate around 25% in the next few years based on future management guidance.

3

Intc.com 9McKinsey.com 10AlixPartners

11

irs.com

INTEL CORPORATION VALUATION (SUMMER 2015) 18

China Relationship - Intel currently has semiconductor manufacturing facilities in Arizona, Israel, New Mexico, China, and Massachusetts where they manufactured their 14nm, 22nm, 32nm, 45nm, 56nm, 90nm, and 130nm products respectively.3 The facility in China has been set up in 2014 and is poised to realize benefits over the next few years.

The company has decided to bring advanced Intel technology to China’s Chengdu province over the next few years. The company has cited plans for partnering with the local government to support operations. Intel expects to service the mobile communications division through its Chinese operations.12 While other competitors such as Qualcomm face troubles in China, the government is welcoming high yield technology sharing partnerships with domestic operators.12 Operating Margins - Intel expects to constantly gain bottom line befits by improving operating efficiencies.

Management has a 200 to 250 basis points improvement in operating margins to around 30% over the next few years3. Moreover, Intel’s current line of businesses such as equipment manufacturing, fabrication, design, development, and market command higher operating margins than industry competitors.

Windows Support13 - Microsoft stopped support for their Windows XP platform in 2014, which transitioned a number of small businesses using XP to newer systems that increased the demand for PCs. Similarly, Microsoft stopped mainstream support for Windows 7 in 2015, due to the number of small business’s transitioning from Windows 7 to other platforms. This will increase, offsetting the decrease in PC revenues.

RISK FACTORS

US Dollar: Intel derives 82% of its revenues globally. The company is under potential threat of rising exchange rates. As Intel relies on a business to business framework, almost all of the company’s revenue is transacted in US dollars. However, a part of the company’s capital expenditures and operating expenses are in currencies other than the US dollar.

The company has hedged the risk by utilizing competitive hedging strategies, helping the company offset most to all of its risk.

Management guides that an increase or decrease in exchange rates of about 20% would impact the bottom line negatively or positively by 50 million1.

3

Intc.com 12Reuters 13Microsoft.com

INTEL CORPORATION VALUATION (SUMMER 2015) 19

China Risk: Most of the semiconductor companies, including Intel, have manufacturing facilities in China. The US government has provided strict provisions to various US companies on manufacturing in China. In recent developments, the US government shocked Intel by disallowing it to sell it’s 22nm Xeon chips in China due to security threats. Intel sees multiple highly lucrative Chinese companies put on the denial list and cannot do business with them. Intel sees these development as threats in the short term, and could loose significant business and in the long term, allowing Chinese market players to compete with Intel on a broader scale.

Product Mix: The industry has seen to become more and more complex each passing day. The industry complexity has increased the demand for various performance and cost products. Hence, Intel cannot serve all segments of the market in the ways it did in the past. The company is overcoming this barrier by positioning itself in the highly lucrative performance space, and integrating its IP over all platforms.

Global Markets: Led by Europe and China, the global economy has become fragile. The slowing economy of major regional markets is a risk for an industry that derives most of it’s revenues from outside the United States.

Manufacturing Risks: Companies that have their own manufacturing facilities obtain cost benefits, but need to overcome the expenses in slowing or lower than average utilization times.

Intellectual Property Risks: The semiconductor industry and Intel has faced numerous breach and copyright problems in the past. Companies have accused Intel of breach and cheating and so has Intel accused various competitors. Intel can protect its intellectual property in the United States and in other developed markets, but may not be able to obtain the same benefits in world markets.

Revenue Buckets: The company derives 18% of its revenues from Hewlett-Packard Company, 16% of revenues from Dell, and 12% from Lenovo. The stability and operations of these three competitors directly impact top line growth. Intel is investing heavily to diversify its revenue sources and customers, and has been successful in doing so.

INTEL CORPORATION VALUATION (SUMMER 2015) 20

INVESTMENT RECOMMENDATION

Pro’s to Recommendation Growing and Thriving Moore’s law: The company has consistently invested in growing and reenforcing the Moore’s law. It has been successful to the rest of the market and has continued to be a leader when it comes to making high performance products, and architectures to support these products.

Growing Information of Things and Data Center Business: The company has found a new stronghold in the Data Center and Internet of Things segment. The new lines of growing businesses will help the company offset the opportunity cost from the mobile communications business.

Diversified Portfolio: Compared to all other companies in the semiconductor business, Intel has the most diversified line of businesses. Although the company may not be the market leader in all its segments, it’s still the top competitor in many of its segments.

Foundry Facilities: The company has its own foundry facilities and a strong distinction from its competitors that help the company offset many risks to third party manufacturing processes. These risks include volatility in the costs of raw materials, and inventory risks.

Tax Benefits: Due to increasing investment in R&D and global nature of Intel’s business, the company benefits from a strong tax advantage compared to its peers in the technology sector.

High Return on Equity: The company has benefited shareholders through constant cash repurchases, and constant dividend payments. The company continues to do the same in the near to long term.

Con’s to Recommendation US Dollar Risk: The US dollar has been strengthening and Intel has a modest exposure to currency risk. The company manages the risk effectively by hedging its exposure. However, large changes in currency prices can harm the company’s earning potential and pricing competitiveness.

Slowing Chinese and Japanese Markets: The Chinese and Japanese markets have been slowing over the last few years. They have been the largest markets for semiconductor companies. Slowing of the markets is a sign for industry saturation. However, the company will need innovative and service unique products to support these markets.

Slowing Worldwide PC Business: The company’s PC business is the flagship business and has been since decades. Slow growth in the number of people having personal computers has affected the company and will continue to hurt the company in the short term. The company has identified strategies to diversify into Internet of Things and Data Centers to offset slow growth in the PC business.

INTEL CORPORATION VALUATION (SUMMER 2015) 21

Delayed Altera Benefits: Intel paid a premium price for Altera as per EPS and market price estimates. Intel expects to realize benefits from Altera that will justify the premium benefits in the years to come. However, management does not expect any added benefits till mid to late 2016.14 BUY

INTEL’S PURCHASE OF ALTERA

On June 1, 2015 Intel announced the acquisition of Altera (NASDAQ: ALTR). Altera, founded in 1983, is a world leader in programmable logic devices and complex digital circus. The main focus of Altera’s products include FPGA’s, CPLD’s, embedded processors, and ASICs. This acquisition will be the largest acquisition made by Intel, and one of the largest for the entire industry. The $16.7 billion deal will take between 6-9 months and will be funded through cash and some debt, where FCF will be affected in the first year after the closed deal.

The acquisition of Altera by Intel will change the semiconductor market due to the strategic opportunities these companies will have by combining customers, engineering resources, and supply chains. The synergies between these two companies can be divided into two types, product synergies and cost and manufacturing synergies.

Product Synergies – Altera is an industry leader in FPGA microprocessors. FPGA chips are an integrated circuit chip designed to be able to be programmable by a designer or customer after manufacturing.

The most significant product synergies between these two companies is the integration of FPGA 14

Model does not include Intel’s purchase of Altera

INTEL CORPORATION VALUATION (SUMMER 2015) 22

chips with Intel’s Data center segment and Internet of Things (IOT) segment.

In the data center space, the integration FPGAs will significantly reduce costs and increase performance overall. In the IOT space, the combination of Intel’s atom microprocessors and FPGAs will increase performance.3

In Millions of USD

The integration also creates a cost competitive advantage by eliminating reliance on ACCIS and ASSP chips that are estimated to be fully replaced in the next 3-5 years. As the two companies become an integrated device manufacturer (IDM) under one roof, tremendous opportunities for new product lines will become present as the technological world advances.3 Cost and Manufacturing Synergies – One of the main advantages of the acquisition from a cost and manufacturing standpoint is that the two companies will be operating as an integrated device manufacturer. This will allow a reduction in time-to-market by an estimate of 50%, and provide a significantly quicker design optimization. Intel’s manufacturing leadership is also expected to increase the competitiveness of Altera’s existing group of diverse products.

Another potential target for Intel to position itself in the FPMG market is Altera’s primary rival, Xilinx. Both Altera and Xilinx sell similar products, however a key difference between the two company’s FPMG chips is that Altera uses Intel’s fabrication for their Stratix-10 FPMG family.

As Intel attempts to gain foothold in the FPMG manufacturing business, it would make more sense to continue its ongoing relationship with a management team they have already worked with. Also, changing fabrication in Xilinx FPMG’s, would take a lot more time and money than that with Altera.

INTEL MANAGEMENT

Brian M. Krzanich, CEO3: Krazanich was appointed the chief executive officer of Intel and elected a member of the board of directors on May 16th, 2013. He is the sixth CEO of the company, in the company’s history.

He has an open-minded approach to problem solving and listening to customer needs. His approach has extended the company’s product and technology leadership creating billions of dollars for the firm. He has pioneered Intel’s growth and formidable advances across various new divisions.

Prior to becoming the CEO he held various executive positions in the manufacturing group, supply chain operations, NAND solutions group, and human resources group. He began his career at Intel in 1982 in New Mexico as a process engineer. He holds a bachelors degree in Chemistry from San Jose State University.

3

Intc.com

INTEL CORPORATION VALUATION (SUMMER 2015) 23

Stacy J. Smith, CFO3: He was appointed the chief financial officer of the company in 2010 and has been the executive vice president and director of corporate strategy since November 2012. He also serves as the company’s principal accounting officer. He is responsible for overseeing finance, accounting, taxation, treasury, internal audit, and investor relations.

He joined Intel in 1988 and served in positions Finance, Sales and Marketing.

And Information Technology.

Stacy Smith has been focused on improving operating margins at the company.

He pioneered the 27- 28%% operating margin in 2014 and aims to bring it back to the 30% level over the next few years.

He is an MBA in finance from the University of Texas.

RATIO ANALYSIS

3

Intc.com

INTEL CORPORATION VALUATION (SUMMER 2015) 24

Profitability Ratios: Compared to its competitors Intel has a high operating margin. Intel had higher operating margins in the in 2010 and 2011, however, due to the increase in investments across research and developed have reduced the company’s margins. The company estimates it’s operating margin to be around 30% in the years to come. The company feels that it can drive the high operating margins through its data center business that provides almost 40-50% in operating margins based on management guidance. The company has one of the highest net profit margin in comparison to its peers. The high net margins are primarily due a lower tax rate the company has compared to its peers. Intel has historically bought back shares and returned strong dividends providing a high return on equity to its investors. Intel’s diversity of businesses has allowed the company to maintain a return on assets above the industry average.

Operating Ratios: Intel’s Operating ratios have been consistently higher compared to industry averages. In the recent years the expansion to various geographies has slightly weekend the receivables turnover values. Intel’s fixed asset turnover differs from its competitors because Intel has its own foundry business. As Intel design, manufactures and markets its own chips, Intel has a lower fixed asset turnover compared to its competitors that have a higher portion of current assets compared to their fixed assets.

Liquidity Ratios: Compared to its competitors Intel has lower liquidity ratios, because the company has efficiently deployed capital either through acquisitions, equity investments, share repurchases or investment in research and development. Moreover, Intel uses less debt compared to its competitors even with its foundry business that helps the company to have a higher times interest earned and lower financial leverage ratio.

Debt Utilization Ratio: Intel has historically had lesser debt as compared to its competitors. To make better use of capital especially to fund new research and development projects, and capital expenditures the company has increased the debt it has on its books. The company has historically had a lower cost of debt compared to their cost of equity due to the higher Z score and the credit rating. Hence, the company considers it feasible to raise additional debt on its balance sheet because it’s in-expensive for the company.

INTEL CORPORATION VALUATION (SUMMER 2015) 25

Valuation Ratios: Compared to the industry Intel is trading at a discount through its valuation multiples.

Moreover, the company witnessed top as well as bottom line growth over the last two years, that drew attention to the stock and increased its price to earnings and price to book values. Moreover, Intel has consistently maintained a higher dividend yield, and consistently increased dividends over the last few years.

Z-Score: Intel has had a high Z-score which provide us guidance that the company has lower chances to go bankrupt. Moreover, the Z-score continues to increase over the last few years. Intel, saw decreasing revenues in 2011 and 2012, that reduced its Z-Score. However, the company has seen robust growth in the last two years that has helped the company to reduce the probability of bankruptcy.

Credit Rating: The company has consistently held the highest credit rating of A+, provided by Standard and Poor credit rating agency, since FY 2003. The high credit rating has allowed the company to keep a lower cost of debt compared to its peers.

Capital Expenditures to Revenues: Compared to the industry and its competitors Intel has always had higher capital expenditures. The reasons for the higher capital expenditures can be attributed to the diversified line of products, and the foundry business. In the last few years the Cap Ex. To revenues expenditure decreased because of Intel’s increase in earnings. Management, expects the Capital expenditures to be around 17-18% of revenues over the long term.

FINANCIAL ASSUMPTIONS

Revenue Estimates: Intel’s revenue estimates were based on various earnings calls, investor presentations, management guidance, and historical earnings trends.

Data Center Group - The group is one of the fastest growing divisions in Intel. Management expects the group to grow at 15% CAGR. However, the group has not grown at such high rates historically.

Moreover, management has repeatedly changed guidance values. Hence, we used a conservative estimate of 11.98% CAGR through 2018.

Software and Software Services Group - The group primarily earns revenues from Intel’s software solutions provided along with its processors. The PC Client group is major revenue driver for this group. Hence, we’ve estimated a 1.75% CAGR growth through 2018 because of the slow growth for the PC business.

INTEL CORPORATION VALUATION (SUMMER 2015) 26

Internet of Things - The Internet of Things is the newest addition to Intel’s portfolio. The group is one of the smallest, but has seen robust revenue growth over the last year. Although, management estimates the group to grow in the high double digits, we have estimated a 10.45% CAGR through 2019, due to the volatility of newer products in an established market.

PC Client Group - The PC client group revenues have been volatile in the last few years. The groups revenues depend upon the demand for computers, netbooks, all in one computers over the next few years. Although management estimates revenues to be in the mid single digits, we have estimate flat revenues over the next few years.

Mobile Communications Group - The company has had troubling times with the mobile communications group. Management has subsidized its products to increase market share within the mobile communications space. We have estimated revenues to grow modestly over the next few years primarily due to the lesser number of clients Intel can sell its products too within the mobile communications space. The mobile space is well saturated and Intel faces tough competition from the existing players. However, Intel will decrease losses by reducing subsidies on its current products. Moreover, the group stands to benefit from the new and upcoming products. we have estimate a 7.94% CAGR through 2018.

Other - The Others section primarily includes Intel’s foundry business, NAND memory, and new and upcoming devices in test markets. The group has had volatile revenues over the last few years.

Due to the complex sub divisions and costs associated with the group, I have estimated a 3.94% CAGR through 2018.

Cost of Goods Sold (COGS): The line item consists of 3 parts, Depreciation Expense within cost of goods, Amortization Expense, and Core Cost of Goods Sold.

For, the line item as a whole we have used management guidance of 64%, incrementally increasing cost of good sold towards the 64% value.

For Amortization, we have given the management estimates provided in the annual report.

For Depreciation expense within cost of goods, I used management guidance of depreciation to be around 30% of cost of goods in the long term. I incrementally increased Depreciation to reach that value.

The method is popularly used by companies implementing Activity Based Costing.

INTEL CORPORATION VALUATION (SUMMER 2015) 27

Overall Depreciation: Depreciation is divided into 3 blocks. COGS Depreciation, SG&A Depreciation and R&D Depreciation. We assumed COGS Depreciation to be 75% of the overall Depreciation looking at historical values. Using a reverse calculation, we obtained the overall Depreciation number.

We assumed SG&A Depreciation be 10% of the overall Depreciation and R&D Depreciation to be 15% of the overall Depreciation.

SG&A, and R&D: We assumed SG&A to increase at historical averages.

We used management provided 2015 numbers for R&D, and then used historical averages, along with a 1% premium to account for increase in R&D spend in the last few years, to compute R&D expense.

Interest Expense: To estimate the interest expense we had to estimate the total debt and the cost of debt.

We increased total debt at 4.72% CAGR to account for managements guidance to increase the debt to equity ratio. Moreover, we accounted for debt maturities, within my total debt calculation.

Intel has a lower cost of debt than its peers. We used the Cost of Debt for 2014. Moreover, we increased 25 basis points each year to account for increases in interest rates. Although, my cost of debt may be lower than other estimates, we feel the rate has been consistent over the years. The company does not state its borrowing sources, but it has access to really cheap capital that it leverages to obtain the lower value.

Other Non-Operating Income (Loss): For the expense Item, we used the % of Operating method.

We used a historical average and kept the value constant throughout.

Income Loss from Affiliates: Losses from affiliates can be due to bad performance or currency risks. I used a conservative estimate of 100 million and decreased it over the years, in line with managements overall vision of improving operating efficiencies.

Income Tax Expense: Management guides Income tax expense to be around 25%. I used the same rate throughout. Intel has a lower rate because of Intel’s diverse geographical business and research and development tax credit provided by the government.

Tax Allowance Credit: We assumed that management will utilize its current tax credits over the next 4 years equally.

Net Abnormal Losses (Gains): For Net Abnormal losses we assumed the value as a % of Net Income. I used historical averages to compute the value.

Share Repurchases: Management has allocated $12.4 billion for share repurchases through 2018. We assumed that the value will be equally expensed over the next few years based on the forward share

INTEL CORPORATION VALUATION (SUMMER 2015) 28

price estimates during those years. I used my assumptions for P/E and EPS to derive the share price.

Share Issuance: To avoid complication I used a cumulative value of the overall number of options, subject to vest shares, and other common shares the management expects will be issued through August 2016.

We expensed the shares at 50%, because of their variety (such as options may be expensed at 20% or 80%, based on the contracts mentioned) to obtain the cash provided from share issuance. Moreover, We assumed that the shares will be issued in 2015 and 2016 equally.

Property Plant and Equipment: We assumed PPE growth to be decreasing over the next few years. Management, does not expect to open (with the exception of China’s government incentivized/sponsored) facilities over the next few years.

Capital Expenditures: We’ve assumed Capital Expenditures to be in line with historical averages as a percentage of revenues. We assumed capital expenditure to be at 17.16% year over year.

VALUATION ASSUMPTIONS

Price to Earnings: We looked at the Price to Earnings ratio since 2003. Intel’s harmonic price to earnings has been around 15.24x. Using the same assumption, and assuming the company will be in the growth stage over the next few years we assumed the price to earnings to be around 15x for 2015, and decreasing by 25 basis points year over.

INTEL CORPORATION VALUATION (SUMMER 2015) 29

Beta Estimates: We ran a regression, and used an adjusted beta value of 0.93 for our model. The harmonic and average beta are at around 0.96, because they account for the volatility in the stock price in 2015.

EPS Estimates: From our financial statements and our earlier stated assumptions we have obtain EPS for 2015, 2016, 2017, and 2018 at $2.22, $2.42, $2.69, and $2.97.

Our estimates are in line with estimates from other analysts. In some cases our estimates our are a few cents premium to other analysts because we believe other analysts don’t account for the growth potential the company has over the years.

For our 2018, estimates we are conservative compared to 1 other analyst (as only 1 estimate was available). We believe that the other analyst is expecting supernatural growth in 2018 to assume such a high value. Although the value may be right but, it incorporating such a value may cause serious errors in our calculation.

INTEL CORPORATION VALUATION (SUMMER 2015) 30

Dividend: We have assumed dividend growth at the 2014-2015 value of 6.67% through 2018.

Risk Free Rate: We used the 30 year treasury bill value on 3rd of June, 2015 at 3.08%. We used the same date in all our calculation of Intel’s price - $31.78.

Cost of Equity: We have used two methods in obtaining our cost of equity. The first method is the CAPM model and the second method is the BBM. Through our CAPM model, we obtained the Cost of Equity to be 8.38%.

In our BBM, we assumed an average Cost of Debt at 5.6%. We obtained the value removing an average of 1000 A+ US dollar and US Issued corporate bonds having a 15+ year maturity1.

We then added a 4% premium, and obtained the Cost of Debt at 9.6%.

REVENUE ESTIMATES

The items in red are segments not reported by the company anymore.

1

Bloomberg

INTEL CORPORATION VALUATION (SUMMER 2015) 31

INCOME STATEMENT

INTEL CORPORATION VALUATION (SUMMER 2015) 32

BALANCE SHEET

INTEL CORPORATION VALUATION (SUMMER 2015) 33

CASH FLOW STATEMENT

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DDM, CAPM & BBM

Using our CAPM cost of equity we obtained the stock to be undervalued by 14.57% and using our BBM cost of equity we obtained the stock to be undervalued by 11.35%.

INTEL CORPORATION VALUATION (SUMMER 2015) 35

P/E & EPS SENSITIVITY

INTEL CORPORATION VALUATION (SUMMER 2015) 36

PEG, PVGO & ALPHA

INTEL CORPORATION VALUATION (SUMMER 2015) 37

FCFE

Using our CAPM cost of equity we obtained the stock to be undervalued by 25.61% and using our BBM cost of equity we obtained the stock to be undervalued by 22.19%.

INTEL CORPORATION VALUATION (SUMMER 2015) 38

CURRENT NEWS

INTEL TO ACQUIRE ALTERA

by Alex Sherman and Jack Clark, March 27, 2015, Bloomberg Intel Corp. is in talks to acquire Altera Corp., people with knowledge of the matter said, as the world’s largest chipmaker searches for growth beyond a moribund personal-computer market. The people asked not to be identified discussing private information. The Wall Street Journal reported earlier on the discussions. Altera shares jumped 28 percent to $44.39 at the close in New York, giving the company a valuation of about $13.4 billion. Intel rose 6.4 percent to $32. Chuck Mulloy, a spokesman for Santa Clara, California-based Intel, and Sue Martenson, a spokeswoman for San Jose, California-based Altera, declined to comment. Intel is on the hunt for growth as it faces a slowdown in the market for PCs that forced a$1 billion cut in its first-quarter sales forecast earlier this month. Sales in the worldwide PC market will shrink 4.9 percent this year, IDC said, as consumers around the world spend more on mobile devices typically based on processors using designs from Intel rivals such as Qualcomm Inc. That decline comes on top of heavy losses in Intel’s mobile division. The group reported an operating loss of $4.21 billion for 2014. A bright spot for Intel is the data-center group, where profits soared to $7.28 billion on sales of $14.4 billion in 2014. The company benefited from a boom in the amount of data being generated and held in computing centers around the world.

Altera’s Chips Altera makes a broad range of low-power programmable semiconductors, which are used in small embedded devices and computer servers for big data centers. In buying Altera, Intel could expand into markets for automotive, industrial and communication applications, while cementing its lead in data centers, said Betsy Van Hees, an analyst at Wedbush Securities Inc. Hees has a neutral rating on the stock. “This would be a significant move for Intel, it would be a significant change in strategy,” she said. “They need diversification beyond the PC market. Data center has been a tremendous source of strength. Mobile has been a tremendous financial drain.” Intel and Altera announced a manufacturing partnership in February 2013, agreeing that Altera chips would be made in Intel’s cutting-edge plants. That deal was extended in March last year when the companies agreed to do more detailed work together on chip packaging and design.

Data Centers An acquisition of Altera would help Intel make further inroads into corporate data centers and reduce its dependence on a PC market pressured by the rise of mobile computing, according to Stacy Rasgon, an analyst at Sanford C. Bernstein & Co. who has the equivalent of a sell rating on Intel’s stock. “It makes sense that they would potentially be looking for other opportunities to grow the other part of the business,” Rasgon said. “There are synergies, say, in Intel’s data-center business.” Intel could use Altera’s technology to create new processors that pair its traditional products with low-power communications chips, wrote Jefferies Group LLC in a note circulated after the market close on Friday.

Taking Share That would let the company “offer cloud-service providers like Google, Amazon and Facebook the ability to pull communication processing from expensive networking equipment into much lower-cost server blades, effectively enabling Intel to take share in the data-center networking-equipment market,” Jefferies wrote. Altera reported operating income of $543.4 million on sales of $1.93 billion in 2014, compared with Intel’s full-year revenue of $55.9 billion. The acquisition could be a cash cow for Intel by letting it pour Altera’s chips through its aging chipmaking facilities, Hees said. This would help Intel amortize the expense of new plants, which can cost as much as $10 billion. “It makes sense for them to forge forward in terms of acquiring them,” she said. “They have the capacity.”

Semiconductor makers are turning to acquisitions as they seek new avenues of growth. Intel’s biggest acquisition to date was the purchase of security software maker McAfee Inc. in 2010 for $6.59 billion. Dutch chipmaker NXP Semiconductor agreed earlier this month to acquire Freescale Semiconductor Ltd. for about $11.8 billion.

INTEL CORPORATION VALUATION (SUMMER 2015) 39

CURRENT NEWS

INTEL’S NEXT BIG HOPE

by Jonathan Vanianan, April 14, 2015, Fortune Inc. Intel’s revenue remains stagnant because of a decline in desktop computer sales. But will the rise of cloud computing help the company get more cash?

If you needed another reminder that the personal computer business is continuing to slump, look no further than Intel’s flat first quarter revenues that it blamed on people being uninterested in buying PCs. But as those sales continue to decline, Intel sees a bright light when it comes to selling microchips to data center operators and cloud companies that handle computing for their customers. Intel expects this business will contribute more heavily to its future revenue. It’s just a question of whether that business will grow fast enough to offset the public’s lack of interest in desktop computers.

Intel executives explained several times during the company’s earnings call with investors Tuesday that the declining PC market played a big role in the company’s disappointing quarterly sales of $12.8 billion. Intel CFO Stacy Smith spelled it out even more when talking about the performance of the division that includes both PC and mobile sales by emphasizing the weakness in the PC side of the business.

Even with the upcoming summer release of Microsoft’sWindows 10 operating system, Intel CEO Brian Krzanich said the company is “not currently forecasting a big recovery or boom in the second half” of this year. His lukewarm comment tells you something about what he thinks about the public’s interest in yet another updated version of Windows.

However, Intel executives repeatedly explained that its data center group and another focused on the Internet of Things, a buzzword for the emerging market of everyday appliances that are connected online, will “offset the decline” of the PC business. Eventually, it and the company’s other emerging units will lift future revenue, they said.

But those business lines are significantly smaller than Intel’s PC and mobile device group, which accounted for $7.4 billion of the overall $12.8 billion in first quarter sales. Intel’s data center group took in $3.7 billion compared with $3.1 billion in the same period a year earlier while its Internet of Things group had $533 million in quarterly sales versus $482 million in the corresponding quarter of 2014.

Unless these big hopes start raking in significant amounts of cash in the upcoming year from cloud providers and corporations wanting the latest Intel data center processors, like its new custom chip used by Amazon Web Services, it’s hard to see them making up for weak PC sales any time soon.

And while Intel INTC -1.45% tried to reassure investors about its focus on selling silicon chips to data centers and cloud providers, Krzanich acknowledged that sales in that sector is “lumpy.” There’s nothing set in stone about businesses like Amazon AMZN -0.89% and Google GOOG -0.63% deciding to buy more gear for data centers, unlike the more established and consistent buying patterns by PC manufacturers.

“Don’t be surprised if there’s a high quarter or not as high quarter,” Krzanich said, warning investors to expect what they generally dislike from these new cutting edge businesses: big unpredictable swings in sales.

INTEL CORPORATION VALUATION (SUMMER 2015) 40

CURRENT NEWS

Intel Net Up, but Outlook Disappoints

by DON CLARK , Jan 15, 2015, Wall Street Journal Intel Corp.’s income jumped 39% in the fourth quarter aided by surging sales of server chips, even as demand for personal computers appeared to lose steam.

The Santa Clara, Calif., semiconductor maker’s revenue increased 6% from a year earlier and its closely-watched gross profit margin, or earnings after production costs, widened slightly from the third quarter.

But Intel’s mobile and communications businesses continued to incur heavy operating losses, reflecting subsidies the company paid to get its chips into tablet computers. Its projections for revenue and profit margin in the first quarter also disappointed some analysts.

The company’s shares, which rose nearly 40% in 2014, declined 2% in after-hours trading.

Intel, the biggest supplier of chips that handle calculations in computers, suffered between mid-2012 and early 2014 as consumer spending shifted to smartphones and tablets from PCs. The PC chip business began to recover last spring, as the threat from tablets based on competing chips, especially in corporate offices, receded.

Brian Krzanich, Intel’s chief executive, said on Thursday that the company entered 2014 expecting roughly flat revenue and wound up achieving 6% growth for the year. “Intel is in a very different place today than we were just 12 months ago,” he said during a conference call with analysts.

Mr. Krzanich said server chip sales were unexpectedly robust. Sales of PC chips also were surprisingly strong, but the pace of improvement appears to be slowing. Revenue at Intel’s PC client group rose 3%, the company said, compared with the 9% increase it reported in the third quarter ended Sept. 27.

Intel’s latest figures are in line with reports earlier in the week from market research firms, which pointed to strong PC demand in the U.S., particularly inside companies, but slower sales abroad.

“It doesn’t look like the consumer was a big buyer of PCs in the Christmas season,” saidGus Richard, an analyst at Northland Capital Markets.

Revenue at Intel’s data center group, which reflects sales of chips for servers, grew 25% over a year earlier, faster than the third quarter’s 16% jump. “The data center business was spectacular,” said Rick Whittington, an analyst at Drexel Hamilton.

Roger Kay, an analyst with Endpoint Technologies Associates, said Intel may be benefiting from demand from cloud service providers that often buy “beefier” systems, powered by chips with higher price tags.

In tablets, Mr. Krzanich set a aggressive target of placing Intel chips into 40 million devices in 2014. On Thursday, he disclosed that the company reached 46 million.

But he paid a heavy price, offering subsidies to tablet makers to compensate for their costs of shifting from chips based on ARM Holdings PLC’s technology. Intel on Thursday reported an operating loss for the mobile and communications group of $1.11 billion, bringing the total loss for the year to $4.21 billion.

In all, Intel reported profit for the quarter ended Dec. 27 of $3.66 billion, or 74 cents a share, compared with $2.63 billion, or 51 cents a share, a year ago. Revenue rose to $14.72 billion from $13.83 billion.

INTEL CORPORATION VALUATION (SUMMER 2015) 41

CURRENT NEWS Analysts polled by Thomson Reuters expected per-share earnings of 66 cents and revenue of $14.71 billion.

For the current quarter, Intel projected revenue between $13.2 billion and $14.2 billion and a gross margin of 60%, plus or minus a couple of percentage points. Analysts, on average, were expecting revenue of $13.76 billion and gross margin of 61.2%, according to Thomson Reuters.

For the year, Intel projected revenue to rise by a mid-single digits percentage rate and achieve a gross margin of 62% of revenue, plus or minus a couple percentage points. Analysts, on average, were expecting revenue to rise 4% and gross margin of 63.4%, according to Thomson Reuters. —Tess Stynes contributed to this article.

Internet of things gets massive boost with Intel-Altera deal

By Desire Athow, June 1, 2015, Techradar After the acquisition of Broadcom by Avago a few days and that of Freescale by NXP a couple of months ago, Intel has announced that it is buying Altera for a cool $16.7 billion (about ÂŁ11 billion, AU$22 billion).

The deal, which began life as a rumour back in March, dwarfs Intel's previous big acquisition (that of McAfee five years ago) Altera is an important player in the field of IoT (internet of things) although it is particularly active in the less visible (but more lucrative) markets like Smart City, Industry 4.0, Smart Grid, Healthcare and Connected Car. So no, Intel didn't buy Altera for its wearable assets.

Already partners Intel already uses Altera technology in a range of semi-customised Xeon processors that have been snapped up by big iron hardware manufacturers and hyperscale customers as these CPUs can be customized to their own needs. Altera manufactured its top-of-the range Stratix 10 SoC using Intel's 14nm 3D Tri-gate fab.

It's worth noting that just a couple of weeks ago, Intel announced a partnership with fabless semiconductor company, eASIC to bring ASIC technology to its Xeon processors.

It will allow reinforce its data centre and internet of things business units by using Altera's recognised expertise in FPGA (field programmable grid array) and CPLD (complex programmable logic device).

Will Altera move away from MIPS and ARM now that it has been acquired by Intel (and will become a business unit)?

That is the question.

INTEL CORPORATION VALUATION (SUMMER 2015) 42