The company has now applied its chip-making expertise to faster-growing fields, with earnings jumping more than 15% in the last fiscal year.
INTEL CORP. (Nasdaq symbol INTC; www.intel.com) is the world’s leading maker of computer chips: its products power 80% of all personal computers. The company also makes chips for server computers, smartphones and other electronic devices.
Demand for computer chips tends to move up and down with the overall economy. Intel’s sales fell from $53.3 billion in 2012 to $52.7 billion in 2013. Sales then rebounded to $55.9 billion in 2014, but slipped to $55.4 billion in 2015.
To cut its reliance on personal computers, the company has diversified into other types of chips. As part of that strategy, in late 2015, Intel paid $16.7 billion for Altera Corp., a maker of chips called field programmable gate arrays (FPGAs). Users can program them to perform specific tasks, which makes server computers faster.
The company plans to blend Altera’s FPGA technology with its current designs for a single server chip. These integrated chips let systems run much faster than those that use separate chips. Intel predicts FPGA chips will run 30% of the world’s data-centre servers by 2020 as more businesses shift to cloud computing.
Thanks partly to those new operations, the company’s sales in 2016 rose 7.3% to $59.4 billion. Altera contributed $1.7 billion to that increase.
Intel’s earnings fell 12.6%, from $11.0 billion in 2012 to $9.6 billion in 2013. Due to fewer shares outstanding, earnings per share fell at a slower rate of 11.3%, from $2.13 to $1.89.
Earnings improved to $11.7 billion in 2014, but then fell to $11.4 billion in 2015. However, per share earnings rose from $2.31 to $2.33.
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If you exclude costs to integrate Altera and other unusual items, the company’s earnings jumped to $13.2 billion, or $2.72 a share, in 2016.
The company continues to expand in to new growth areas. In March 2017, Intel agreed to acquire Mobileye N.V. (New York symbol MBLY) for $15.3 billion. It should complete the purchase by the end of 2017.
Based in Israel, Mobileye specializes in computer systems and chips for self-driving cars. Over 25 automakers currently use, or have agreed to use, its technology. Intel expects global demand for vehicle systems and data services could rise to $70 billion by 2030.
The company can comfortably afford this purchase. As of December 31, 2016, it held cash and investments of $15.0 billion, or $3.16 a share. Its long-term debt of $20.6 billion is a low 12% of its market cap.
In addition to acquisitions, Intel continues to develop new chips and to improve the efficiency of its manufacturing equipment.
Its research costs rose 5.0%, to $12.7 billion (or 21.5% of sales) in 2016 from $12.1 billion (or 21.9% of sales) in 2015.
The company is particularly interested in developing chips that let non-computer devices communicate over the Internet. The “Internet of Things” could connect 50 billion devices by 2020. Sales of those connected devices rose 14.8% in 2016, and chips for those products accounted for 8% of Intel’s total sales.
The company now plans to open a chipmaking plant in Arizona. The facility was completed in 2014, but weak demand for personal-computer chips delayed operations.
Intel to invest $7 B in new factory
Intel will re-tool this facility to produce advanced chips that power data centres. The company will invest $7 billion in the project over the next three to four years.
At the same time, Intel will reduce its focus on software. In 2011, it paid $7.7 billion for anti-virus software-maker McAfee as part of a plan to diversify beyond computer chips. The company also felt McAfee’s security expertise would help it design chips that do a better job of protecting sensitive data.
However, the purchase did not work out as well as Intel had hoped. That’s mainly why the company is planning to sell 51% of McAfee to private equity firm TPG for $3.1 billion. It expects to complete the transaction in the second quarter of 2017.
Intel also hopes a new deal with rival chipmaker ARM Holdings will spur growth.
The company has had little success developing chips for smartphones, a market dominated by ARM. However, under a new alliance, Intel will let third-party chipmakers produce ARM’s chips using its factories and advanced equipment.
Intel’s recent acquisitions should lift its earnings to $2.80 a share in 2017. The stock trades at a low 12.9 times that forecast.
The company has paid regular quarterly dividends since 1992. Intel just increased that payment by 4.8%, to $0.2725 a share from $0.26. The new annual rate of $1.09 yields 3.0%. In 2016, dividends accounted for a moderate 38.2% of its earnings.
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