QUOTE AND NEWS
Motley Fool  6 hrs ago  Comment 
A slower personal-computer market decline could prove to be a tailwind for this chipmaker.
Motley Fool  Dec 4  Comment 
Intel hires a major exec from ARM Holdings as its new IoT boss, but can he widen the unit’s competitive moat against rivals like Qualcomm?
Motley Fool  Dec 3  Comment 
This analyst suggests that it might happen unless Intel catches up to Qualcomm. This Fool disagrees.
Motley Fool  Dec 3  Comment 
Although the benefits of dual-sourcing might be worth keeping Intel around.
Forbes  Dec 2  Comment 
Activists are concerned about the leak of a zero-day vulnerability by a government contractor, used to expose the identities of a Tor-based site.
Motley Fool  Dec 2  Comment 
This business is losing money for Chipzilla now, but it could be a source of solid profitability for the company in the long term.
Motley Fool  Dec 1  Comment 
The chipmaker is making a lot of the right moves, but investors will have to wait a while to see a potential financial payoff from these efforts.
Forbes  Dec 1  Comment 
One of the most important metrics in analyzing a company’s operations is how efficient it is at reinvesting its earnings to generate future growth. Although it is incorrect to attribute the increase or decrease in income in a subsequent year...
Motley Fool  Dec 1  Comment 
This explanation for Intel's continued high spending levels doesn't mesh with reality.




 

Intel, Inc. (NYSE:INTC) is the world's leading semiconductor producer and has been the industry leader since the inception of the personal computer. Intel produces products for many facets of advanced technology including flash memory products, motherboards, wired and wireless connectivity products and networked storage products.

Since the 1980s Intel has seen growing competition from a number of companies but none more significant than Advanced Micro Devices (AMD). Intel has been in the industry longer than AMD and, with 76.7% market share and 79.7% of the revenue share for micoprocessors, maintains a significant lead over its smaller rival.[1] Intel's net income of $5.2 billion for FY08 when compared to AMD's reported loss of $3.09 billion gives a good picture of the advantage Intel enjoys when allocating money towards R&D($5.722B by Intel compared to AMD's $1.84B). Such high R&D funding has allowed Intel to maintain its leadership position in the semiconductor industry.[2][3]

Intel has strengthened its lead with the release of a new line of processing technology (45nm), known as the Core i7. Chips using this technology are faster and consume less power.[4] AMD rolled out its own 45nm release during the 4Q of 2008.[5]

Company Overview

Robert Noyce and Gordon Moore founded Intel, Inc. in Santa Clara, California in 1968. Intel began as an engineering and technology company and developed the first microprocessor chip in 1971. Upon the invention of the personal computer (PC) microprocessors became Intel's main business. Intel has always enjoyed the largest market share in the industry and only began facing competition in the 1980s. Since it was founded Intel has always been on the cutting edge of microprocessing technology.



Business and Financial Metrics

The slowing of the global economy in the past year led to a decrease of 2.1% in the net revenue for FY08 ($37.5B) from $38.3B in FY07.[3] The company reported a lower forth quarter revenue compared to its 3rd quarter revenue for only the second time in 20 years for FY08. The following table highlights the financial metrics for the firm over the last three years.[6]

Years 2008 2007 2006 2005 2004
Net revenue[3] $37,586 $38,334 $35,382 $38,826 $34,209
Gross margin[3] $20,844 $19,904 $18,218 $23,049 $19,746
Research and Development Costs[3] $5,722 $5,755 $5,873 $5,145 $4,778
Operating Income[3] $8,954 $8,216 $5,652 $12,090 $10,130
Net Income[3] $5,292 $6,976 $5,044 $8,664 $7,516

Business Segments

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Digital Enterprise Group (DEG)

This group manufactures products that are incorporated into desktop and nettop computers, enterprise computing servers and workstations, a broad range of embedded applications, and other products. DEG’s products include microprocessors and related chipsets and motherboards designed for the various computers mentioned. The growth in the mobile industry has affected this group's revenue generation, reducing the percentage contribution to the company as a whole.[7]

Mobility Group

This group manufactures and produces processors for notebook computers and all other mobile devices. Recently the mobility group has been increasing its percentage of total revenue.[8]

Others

Digital Health Group

Focused on providing technology for all aspects of the health care field. While no specific products have come out of this division to date, their goal is integrate technology into health care research, diagnostics and productivity, and personal health care.

Digital Home Group

Makes Intel products available around the world to third party distributors, dealers, system integrators and solution providers. Furthermore, this group designs products to meet local needs around the world.

NAND Solutions Group

Produces all of Intel's flash memory products for both embedded and wireless markets. This group includes the NAND flash memory products that are produced in Intel's joint venture with Micron. This joint venture has launched a high speed NAND flash memory technology that supposedly is five times faster than conventional NAND.

Years 2008 2007 2006
DEG[9]55%56%58%
MG[9]42%38%35%
Others[9]3%6%7%
Total Revenue[9] $37,586 $38,334 $35,382

R&D Model

Intel's current development model, known as the "tic toc model", calls for the introduction of a new process technology every odd year, then a move towards a new architecture during each even year. This model can be seen with Intel's introduction of their core architecture in 2006 on 65nm process technology, which has now transitioned into 45nm process technology (introduced in 2008). The company is currently developing 32nm process technology, which they expect to use for manufacture of products in second half of 2009.[10]

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Process Technology and Architecture

  • Process Technology: Process technology refers to the technology that is involved in creating microprocessors. AMD's 65nm process technology is considered to be superior to that of Intel, but recently Intel went further when it announced its new 45nm process technology. Intel is now beginning the transition of replacing their 65nm processors with the more superior 45nm processors. These numbers (65nm, 45nm) refer to the thickness of the insulation on the transistors inside the microprocessors. With thinner insulation (that is still effective) the density of circuits on a processor can be increased. As a result, processors can be made both smaller and more powerful. On Monday, March 30 2009 Intel rolled out a new server chip, codenamed Nehalem and officially called Xeon 5500, which will play a key role in the trend toward cloud computing, in which businesses tap computing power in a broader network.[11]
  • Architecture: Currently Intel uses what is known as "multi-core" architecture for its processors. Essentially architecture refers to the design of the chip. How the chip functions depends on its architecture and generally changes in architectural design are attempt to create more efficient, or more powerful processors.

Performance Metrics

Microprocessors are rated on a number of characteristics that measure their performance. These measurements are the most important factors for determining the success of a specific line of products and as such are the focusing points for creators of these chips. Some lines of chips will focus more on one factor than another in an attempt to predict what the market prefers (i.e. faster chips, or more energy efficient chips, etc.)

  • Clock Speed: Microprocessor speed is an important indicator of how powerful the product is. In this ultra-competitive industry Intel and AMD compete to produce faster processors, even if the difference is very minimal. While clock speed is not the only performance factor that determines how good a processor is, it certainly plays a significant role.
  • Power Usage: On top of clock speed, Intel and AMD compete to make fast processors that use less power. Processors that can provide the same computing power while using less energy are more efficient and more valuable.
  • Performance Per Watt: This measures the computing power of a microprocessor for a single watt of energy. In 2005, this metric proved to be a very important characteristic of server processors. AMD's performance-per-watt focused processor was more appealing to the server market than Intel's clock speed focused processor because of the significant difference in power usage (and thus electricity bills.) As a result, AMD saw an 18.5% jump in the server market share between 1Q05 and 2Q06.
  • Temperature rating: All the power used by the processors generates heat, and when the temperature rises too high, they stop working. So to keep them running cooling systems are used, which use more power. If the processors can tolerate operating at higher temperatures, then less cooling is needed, and the overall cost of running them is lowered. This may sound insignificant, but is a major issue for companies with large datacenters containing hundreds of thousands of processors, for example in 2008 Google reportedly demanded that Intel supply its chips rated to work at least 5 degrees centigrade hotter than their standard rating.

Products & Customers

Intel's product line is made up of many different computing components including microprocessors, flash memory, motherboards, wired and wireless connectivity products, communications infrastructure components, and products for networked storage. Intel has released its latest line of processors, called the Cloverton processor. The Cloverton is a quad-core processor, a jump in microprocessing technology that is about six months ahead of AMD's technology. Intel expects its new quad-core processors to make up 75% of its server mix by the end of 2007.

Intel sells its products to a number of different types of customers:

  • Original Equipment Manufacturers (OEMs) and Original Design Manufacturers (ODMs) are customers who produce computers, handheld devices, and telecommunications and network communications products. The products that these manufacturers produce rely on the processors and other products that Intel makes.
  • PC and network communications product users are customers (individuals, small and large businesses, etc.) that buy Intel's products through distributors, resellers and retailers across the world.
  • Other manufacturers including producers of a broad spectrum of industrial and communications equipment also have significant for Intel's products.


Trends and Forces

Semiconductor Cyclicality

The semiconductor industry is deeply cyclical. Demand in up cycles is so high that chip manufacturers have trouble keeping up. Similarly, if electronic sales, particularly PC sales, are slow, demand for chips can plummet. The fact that the semiconductor industry is more subject to the whim of consumer demand more than corporate demand, also adds to the overall volatility. The backdrop of this high market volatility, however, has been continual growth. Over the last 20 years the semiconductor industry has seen about a 13% average annual growth rate.

Semiconductor sales have shown about an 80% correlation with GDP growth trends, meaning a downturn in GDP growth could very likely be accompanied by a downturn in semiconductor sales.

Declining Computer Demand

The growth of demand for personal computers has slowed since the 1990s. As a result, Intel's growth has slowed as well. The demand for the products that use Intel's microprocessors is very much a determinant of Intel's success. Unfortunately this factor is out of Intel's control. Continuing to increase the productivity and applications of their products through research and design is necessary for Intel to remain on top of the microprocessor industry.

Cost-Minimizatin Efforts

In September 2006 Intel released restructuring plans that, if effective, would significantly cut costs of production. The effect of these efforts have begun to be realized in 2007 third quarter earnings with a 23% increase of gross margin from third quarter 2006.

Innovation Focus

Intel spends significantly more on research and design than AMD in an effort to remain on the cutting edge of the technology field. Intel has introduced the world's first 45nm microprocessor which boasts smaller size and greater power than the previous 65nm microprocessors. Making the transition to 45nm could face execution difficulties such as product defects.

Intel's innovative approach has also led to investments outside of the United States. On Tuesday, October 28 2008, Intel announced its first "clean-tech" initiative in China, a $20 million equity investment in Trony Solar Holdings Co., one of China's biggest makers of solar energy and wind power equipment.[12]

Trying to Enter the Mobile Phone Market

Intel unvelied its Atom microprocessor in April, 2008 as the company anticipated the launch of mobile internet devices from some PC makers. However, Intel now plans to use the second generation of the chip, expected to release in 2009, for smart phones. There is a growing trend of mobile phones with internet access such as the iPhone and the BlackBerry. An analyst from FTN Midwest, also noted that the Atom processor is believed to be the chip that will be used in the next iPhone (the one after the new 3G iPhone).[13] Intel plans to use its atom microprocessors as well as the 4G service WiMax, to enter into this expanding business. Intel will use the WiMax network that is being built through a seven company joint venture headed by Sprint and Clearwire. Intel has tried to make a move into the mobile phone market before with its XScale division, but ended up selling it off in 2006.[14]


Antitrust Investigations

An official investigation of Intel concerning possible antitrust violations has been undertaken by the Federal Trade Commision. The investigation will look specifically into whether or not Intel has practiced anticompetitive conduct. AMD stated that they believe that Intel gives rebates to some of the larger PC makers that allows the PC makers to purchase Intel's processors below production cost. The Korean Fair Trade Commission agrees with this claim as they fined Intel $25M after finding that Intel gave out $37 M in rebates to Samsung Electronics and Trigem Company in return for promising not to buy microprocessors from AMD. Intel contested that they do not give out rebates, but rather offer volume based discounts.[15]

Competition

The microprocessor industry is essentially evolving into an unbalanced duopoly. Intel competes directly with Advanced Micro Devices (AMD). While Intel still enjoys a significant advantage in market share, AMD has been gaining ground in the industry. AMD is one of the main focuses for Intel in 2007. They're agenda hopes to pressure AMD into a retreat, then subsequently generate significant growth in 2008 with innovative product releases. Intel views AMD's current spending (which is very high) as irrational and unsustainable. This strategy has led AMD to cut prices and lose ground in market share for 2007. Below are the recent breakdowns for market shares among the different divisions of the microprocessing industry.

Intel's release of new products in 2006 and into early 2007 has shown advances on technology that AMD has not yet been able to achieve. The release of the quad-core processors for the mainstream has raised the bar for performance in the industry. Intel has also made breakthroughs in microprocessing technology with the release of its 45nm process technology, an advance where AMD is lagging. The second half of 2006 and early parts of 2007 were periods in which Intel improved its position as the leader in the microprocessing industry. However, Intel has had a couple of missteps in early 2008 which could help out AMD. Intel's next generation Centrino processor had a problem with FCC certification which will delay its availability in the US. In addition, there are issues with the graphics in Intel's Montevina notebook platform. AMD is capitalizing on Intel's graphics issues with its new notebook platform known as Puma. The platform features unviversal compatibility, from low end to high end notebooks. It also boasts high end graphics that Intel's platform does not deliver.[16]

In the Graphics industry, the major competitors are Nvidia and AMD (ATI). These competitors are striving to break into the mainstream computation market, currently satisfied by Intel and AMD's CPUs by facilitating the use of their graphical processor units (GPUs) for use in some non-graphical tasks. They are particularly effective in tasks which can be performed in parallel. However programming tasks to be processed in a parallel manner is non-intuitive to the traditional programmer, so is proving difficult to gain momentum. Nonetheless, the impressive price/performance advantages such 'mis-use' of GPUs provide may cause some concern to Intel in some specialist sectors in the next couple of years.

Market Share Comparison to Competitors (%)
Q207 Q107 Q406 Q306 Q206
NVDA 32.6 28.3 28.5 28.5 19.7
INTL 37.6 38.7 37.4 37.1 40.4
AMD/ATI 19.5 21.9 23.0 20.9 26.7



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References

  1. AMD narrows market share gap with Intel, revenue gap grows (07-02-2008). Retrieved on 2009-06-03.
  2. AMD 2008 10-K pg. 45  
  3. 3.0 3.1 3.2 3.3 3.4 3.5 3.6 INTC 2008 10-K pg. 26  
  4. Giz Explains: Why Intel's Core i7 Processor Is a Beautiful Monster (11-26-2008). Retrieved on 2009-06-03.
  5. AMD completes 45-nm processor, but quad-core Opterons still delayed (03-04-2008). Retrieved on 2009-06-03.
  6. INTC 2008 10-K pg. 27  
  7. INTC 2008 10-K pg. 4  
  8. INTC 2008 10-K pg. 6  
  9. 9.0 9.1 9.2 9.3 INTC 2008 10-K pg. 3  
  10. INTC 2008 10-K pg. 8  
  11. Intel Introduces Much-awaited Server Chip - March 30, 2009
  12. http://www.usatoday.com/tech/science/environment/2008-10-28-intel-solar_N.htm?csp=34
  13. Inte's Atom Chip to Power Future iPhone
  14. Intel to Re-enter the Mobile Phone Market
  15. Intel Said to Face Antitrust Legislation
  16. AMD Shakes PC Notebook Status Quo
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