After Otellini, Intel better aligned with market trends

Despite the early retirement of its CEO, growth and income investors should stay with this stock.

By TheStockAdvisors Nov 20, 2012 12:11PM

Datacraft Co Ltd imagenavi Getty ImagesBy Paul McWilliams, Next Inning

Intel (INTC) announced that its CEO, Paul Otellini, will retire next May. With Otellini only 62 years old, I was not expecting this announcement until mid-decade.

I'm a 'charter member' of the Otellini fan club. Shortly after he became CEO, Otellini laid out a very clear plan as to how he would radically change not only Intel's operational structure, but also the operational culture. Given the course he has chartered, and the structural changes he and his team have implemented, my confidence in Intel's future remains high.

Given the current price of INTC, I think Wall Street is still underestimating it and misjudging how well it is positioned to compete in not only today's market, but also where the market for processor solutions is heading.

While I'm sure some Wall Street pundits will suggest that Otellini is getting out just in time, my view is decidedly on the opposite side of the ledger.

As I see it, Otellini is not retiring early because market trends have shifted away from INTC's strengths, but because the company's strategy and direction is better aligned today with market trends than it has been in nearly two decades.

This is not to suggest that life will be easier or less challenging for INTC going forward. Competition will most certainly remain stiff and unforgiving.

However, now that architectural advances have taken Intel to an intersection where it can fully compete in the mobile markets and maintain its dominance in enterprise markets, I think INTC's best days are yet to come.

New smartphones using INTC's Medfield System on a Chip (SoC) solution have been shown to outperform even the smartphones using Qualcomm's (QCOM) newest chips.

The reason this is interesting is Medfield is Intel's first SoC design for smartphones, and it uses only a single processor core and is fabricated using trailing edge 32nm fabrication technology.

Next year we'll see INTC transition this chip to 22nm FinFET fabrication technology, and from there on to 14nm where the company will likely compete with a one node fabrication advantage versus the half node disadvantage it has with Medfield.

With this roadmap, I believe INTC will move from the nearly zero market share it could claim in smartphones in 2011 to low double digit market share by mid-2014.

In the enterprise markets we've seen INTC substantially expand its market penetration well beyond its core server positioning to where its x86 processors are now commonly used in enterprise storage solutions as well as for control plane processors in networking equipment. INTC was a rounding error in these markets when Otellini took the reins in 2005.

Today the talk is new solutions using ARM Holdings' core processors will take share from INTC in these enterprise markets. I think the share will be modest and that aggregate market growth will be high enough to where INTC will still grow enterprise revenue in spite of seeing some share slip away to ARM.

At the bottom line, my thinking on INTC is unchanged. I think Wall Street is materially underestimating how well the company will do in mobile markets (smartphone and tablet) and overestimating the competitive threat ARM Holdings' core processors present in the enterprise markets.

Based on this view I think the stock has been substantially oversold, and considering the fact that its dividend represents a 4.5% annual yield at the current price, INTC continues to merit consideration as a long-term strategic investment.

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