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Morningstar | Choppy Near-Term Outlook Doesn’t Dissuade Our Positive Thesis on Intel; Shares Undervalued

Intel is the leader in the integrated design and manufacturing of microprocessors found in PCs and servers. With the rise in interconnectivity of devices ranging from PCs to smartphones, Intel strives to provide the most powerful and energy-efficient silicon solution to any product "smart and connected." The data centers used to facilitate the information stored, analyzed, and accessed by various front-end devices are mostly run with Intel server chips.Intel differentiates itself first and foremost via the continued execution of Moore's law, which predicts transistor density on integrated circuits will double about every two years, meaning subsequent chips have substantial power, cost, and size improvements. This scaling advantage is perpetuated through higher-than-peer-average R&D and capital expenditure budget that allows it to control the entire design and manufacturing process in an industry where the majority of competition focuses on only one phase.As cloud computing continues to garner significant investment, Intel's data center group will be an indirect beneficiary. Mobile devices have become the preferred device to perform computing tasks and access data via cloud infrastructures that require considerable server build-outs. This development has provided strong tailwinds for Intel's lucrative server processor business. We believe the Altera acquisition will help Intel maintain its recent growth trajectory in the space, as customers increasingly seek out customized server solutions that use field-programmable gate array chips.The proliferation of mobile devices has come at the expense of the mature PC market, Intel's historic stronghold, with ARM and its cohorts replacing AMD as chief rival. The rise of artificial intelligence has also unleashed a new competitor in Nvidia for specialized chips to accelerate AI-related workloads. Consequently, Intel has built a broad accelerator portfolio via the acquisition of Altera for FPGAs, Mobileye for computer vision chips used in cars, Nervana neural processors, and Movidius video processing units. By 2021, we project the AI accelerator chip market to be $20 billion, with Intel being a direct beneficiary.