Why Intel Is a Core Stock for Your Portfolio
Jan 26th 2012 7:11PM
Updated Jan 26th 2012 7:12PM
What can I say about Intel (NAS: INTC) that hasn't already been said? You probably already believe the company deserves a core spot in your portfolio -- or you're skeptical despite the evidence you've already seen. I've pulled together some amazing numbers to explain why Intel is the heart of high-tech, backed by a brief history of computing that explains how it got there. If you want to invest in the future of technology, I can't think of a better stock.
Intel is the world's largest semiconductor manufacturer, and one of the most profitable. Here's a bird's-eye view of Intel's place atop the industry.
Global Market Share
|Smartphone and Tablet Processors||0%*|
Sources: iSuppli and International Data Corporation (IDC).
The asterisk next to that last segment awaits Intel's long-anticipated mobile beachhead this year. Granted, the company has an uphill battle to fight against ARM Holdings (NAS: ARMH) designs, but there are reasons to believe Intel can make the climb. There's ample precedent, which you'll discover further on.
Despite being caught off-guard by the smartphone explosion, Intel's still managed to capitalize on broader worldwide computing demands in a big way:
Let's break that down a little more. How has Intel's stock price grown over progressively longer periods of time? It's also worth noting that Intel began paying a dividend at the end of 1992, so let's look at the company's annualized dividend growth as well.
|Over 5 Years||8.6%||16%|
|Over 10 Years||(0.3%)||26.5%|
|Over 15 Years||3.8%||26.4%|
|Over 20 Years||15.3%||24.8%*|
Source: Yahoo! Finance.
*19-year annualized growth rates used.
Shareholders who got in during the dot-com era haven't seen the same returns as those who jumped in decades ago, but I shouldn't have to tell you how many other high-tech blue-chip stocks are in the same boat. So why Intel, and why now? Here's why.
Why it's a core holding: the history
As I mentioned, there are historical precedents for believing that the chip giant can come roaring back in the mobile race. Intel wasn't at the vanguard of the early computer age, and it wasn't a first-mover in server chips. But as you've seen, Intel is now the undisputed leader in both segments.
By the time Apple (NAS: AAPL) began to grab personal-computing market share at the beginning of the '80s with the Apple II, it shared a rapidly expanding stage. Atari, RadioShack, and Commodore had been market leaders since the late '70s, gaining ground on early computer manufacturers that were producing what can generously be described as highly un-user-friendly machines.
None of the four major early computer players used Intel processors. It wasn't until the IBM PC and its clones began selling millions of units in 1984 that Intel established a firm foothold in the market. We know how that turned out. Even Apple eventually made the switch to Intel-powered Macs.
Much of the early Internet ran on servers with Oracle (NAS: ORCL) subsidiary Sun Microsystems processors, but the company's leading position dropped precipitously after the turn of the century. Intel made substantial inroads after Sun's fall, but it had to share the market with IBM PowerPC processors and AMD (NYS: AMD) Opterons.
Intel's x86 architecture (which includes AMD designs) didn't pass the market-share halfway point until near the end of 2004, and AMD commanded a quarter of the x86 server market as late as 2006. We know how that turned out.
Why it's a core holding: the future
ARM's CEO recently dismissed Intel's mobile chances, but I wouldn't be surprised if he's secretly quite worried. It would take ARM more than 15 years to invest as much into research as Intel spends in a single quarter. That kind of scale matters a lot in semiconductors. Intel has it in spades, both in terms of its finances and its production capacity. Intel is also the only fully vertically integrated processor maker, keeping its chips in-house from tech spec to final production.
Technology also matters. Intel's upcoming 22-nanometer chips will be the first mass-produced processors in the world to feature 3-D transistors, a unique feature known as the tri-gate. Thanks to this feature, power use can be cut in half while still boosting chip performance by a third. These chips should be rolling off the assembly line by midyear, and Intel plans further size reductions, aiming for 10 nanometers by the middle of the decade. ARM's behind that curve, and its low-power advantage may already be diminishing as it progresses toward smaller transistor widths.
Risks to watch
The tri-gate may not be ready for prime time. Intel might suffer fabrication issues that delay its planned rollouts. The world economy might tank again, temporarily reducing demand for all kinds of computing. ARM might capitalize on major breakthroughs that Intel can't access. Technology is hard to predict, but none of these issues appears to represent a death knell for Intel. The chipmaker's already years ahead of ARM foundry Taiwan Semiconductor in manufacturing processes, and that lead's soon likely to grow.
The bottom line
Intel keeps the world computing. Even if its chips aren't yet in mobile devices, they still run the servers that feed each smartphone and tablet its data. Even if the PC is in decline, Intel's making great progress toward mobile integration. If Moore's Law is ever broken, it's almost certain Intel will reach that point first. Past that, who knows? Maybe Intel-branded quantum computing will hit the market in a few decades and we'll finally reach that singularity Ray Kurzweil keeps talking about.
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At the time this article was published Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter for more news and insights. The Motley Fool owns shares of Oracle, Apple, RadioShack, Intel, and IBM. Motley Fool newsletter services have recommended buying shares of Apple and Intel and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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