Morningstar Equity Analyst Report | Report as of 21 Aug 2015 | Page 1 of 12 Intel Corp INTC (XNAS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQ 27.53 USD 31.00 USD 0.89 3.43 130.88 Semiconductors Standard 20 Aug 2015 20 Aug 2015 20 Aug 2015 20 Aug 2015 Morningstar Pillars Analyst Quantitative Intel's server processor business will be a key growth driver over time, but Economic Moat Wide Wide Valuation QQQQ Undervalued keep an eye on mobile. Uncertainty Medium Medium Financial Health — Strong server processor business. Abhinav Davuluri, Analyst, 21 August 2015 Source: Morningstar Equity Research Investment Thesis Quantitative Valuation Intel is the pre-eminent leader in the integrated design Abhinav Davuluri, Analyst, 28 July 2015 INTC and manufacturing of microprocessors found in traditional Analyst Note aUSA personal computers. With the rise in interconnectivity of IM Flash (the NAND joint venture between Micron and Undervalued Fairly Valued Overvalued devices ranging from PCs to smartphones and tablets, Intel) announced on July 28 a new development in memory Current 5-Yr Avg Sector Country Intel strives to provide the most powerful and energy- technology called 3D XPoint (cross-point), which is Price/Quant Fair Value 0.85 0.92 0.87 0.89 efficient silicon solution to any product "smart and projected to be up to 1,000 times faster than current NAND Price/Earnings 11.7 13.1 20.5 20.4 connected." Additionally, the data centers used to flash technologies and 10 times denser than today’s Forward P/E 11.4 — 15.1 15.0 facilitate the information stored, analyzed, and accessed DRAM products. As a result, shares of Micron rose about Price/Cash Flow 7.1 7.1 13.4 11.9 Price/Free Cash Flow 12.6 13.7 19.2 18.7 by various front-end devices are largely run with Intel 9%, closing in on $20 per share. Although shares are in Dividend Yield % 3.43 3.28 1.91 2.24 server chips. 4-star territory, we reiterate our very high uncertainty Source: Morningstar relative to the volatile memory space in addition to our Intel differentiates itself first and foremost via the view that Micron will not begin materially recovering until Bulls Say continued execution of Moore's law, which predicts early 2016. OIntel is the largest semiconductor company in transistor density on integrated circuits will double about the world. The firm has sustained its position at every two years, meaning subsequent chips have 3D XPoint is slated to be the latest class of memory since the forefront of technology by investing heavily in substantial power, cost, and size improvements. This the 1989 introduction of NAND flash memory. While R&D, and this trend should continue. scaling advantage is perpetuated through a higher than production has already begun in the joint venture’s OThe firm holds a roughly four fifths share in the peer average R&D and capital expenditure budget that dedicated fabrication plant in Lehi, Utah, commercial microprocessor market. allows Intel to control the entire design and manufacturing shipments aren’t expected until 2016. Previously, it was OIntel has an immense budget for capital process in an industry where the majority of competition announced that the latest 3D NAND would also ramp in expenditures, allowing it to maintain the most focuses on only one phase. 2016. We see the potential for cannibalization in certain cutting-edge semiconductor manufacturing technologies memory markets, primarily in functions that require a in the world. In recent years, Intel has seen a shifting competitive massive in-memory database, fast system recovery, low landscape resulting from the proliferation of mobile latency, and high endurance. High-performance Bears Say devices, at the expense of the mature PC market, with computing is the primary target application, including OPC industry growth has slowed from the heady ARM replacing Advanced Micro Devices as chief rival. high-fidelity pattern recognition (facial, speech, rates of the 1990s. As a result, Intel's opportunities Consequently, Intel has been forced to shift its biometrics, etc.) but there is also the potential for more to expand may be limited. characteristic approach of offering high-performance, advanced gaming and scientific uses that need to access OIntel must successfully maintain its technology power-hungry processors in lieu of variants similar to immense amounts of data at high speeds. lead in the processor market. Any missteps by the ARM's low-power consuming designs that inhabit most firm could trigger market share loss to AMD. smartphones and tablets. Intel's latest Atom processor, With respect to the technology itself, IM Flash OAMD's purchase of ATI in 2006 has given Intel's running on its Silvermont architecture 22-nanometer representatives described the cost for 3D XPoint to be smaller rival the know-how and technology to offer platform, has bridged that gap to become comparable in somewhere between that of NAND and DRAM. 3D XPoint platform solutions as well. power efficiency relative to ARM offerings. We believe sues a crosspoint structure that allows denser packing, in this progress will be rewarded with more design wins for addition to newer materials with unique properties that the Atom over the next year, which should mitigate ARM's are able to store memory in a fundamentally different way current stronghold in the space. than current memory products. The proposed specifications look impressive at face value, but we are As cloud computing continues to garner significant reluctant to significantly recognize additional growth on investment, Intel's server processor business will be an just this announcement. indirect beneficiary. Tablets are becoming the preferred device to perform computing tasks and access data via Economic Moat cloud infrastructures that require considerable server Abhinav Davuluri, Analyst, 21 August 2015 buildouts, which will provide tailwinds for Intel's lucrative We believe Intel’s wide moat emanates from its superior © 2015 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained ? herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. See last page for important disclosures. Morningstar Equity Analyst Report|Page 2 of 12 Intel Corp INTC (XNAS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQ 27.53 USD 31.00 USD 0.89 3.43 130.88 Semiconductors Standard 20 Aug 2015 20 Aug 2015 20 Aug 2015 20 Aug 2015 cost advantages realized in the design and manufacturing process designs. We believe that Intel’s Silvermont Atom of its cutting-edge microprocessors. This in-house chips, manufactured on its 22-nanometer process capability supports a streamlined supply chain, shorter technology, will help increase its presence in the mobile time to market, and the ability to scale promising products device market. Looking further, any significant design wins more rapidly. Semiconductor manufacturing is inherently would set up the 14-nanometer Airmont Atom chip quite capital-intensive thus requires methodical planning and nicely for next year. In addition, Intel has been building its execution to keep the cost per chip at a reasonable level. wireless connectivity portfolio with multiple acquisitions Intel accomplishes this through investments in the latest to give it in-house Wi-Fi, Bluetooth, GPS, and near field process equipment technologies. However, in order for communication technologies. The logic behind this the economics of the business to be pragmatic, there strategy is to combine these components on an LTE modem needs to be strong demand via differentiated products chipset with an application processor to increase its that can be sold at high margins, which Intel achieves footprint in mobile devices. These investments have the with its massive research and development budget that potential to make an impact not only in mobile, but also averaged $10.7 billion annually from 2012 to 2014. in adjacent products ranging from tablets to the Internet of Things. Although these developments don’t move the Following along the pathway prescribed by Moore's law, needle for us just yet, we believe Intel is making a step in coined by one of Intel's chief founders Gordon Moore, the the right direction to establishing its presence in the number of transistors per unit area doubles approximately mobile space. every two years. As process technologies develop, the cost per unit area increases while the unit area per Furthermore, the x86 ecosystem (in which Intel’s core transistor decreases. Thus, by netting these two trends, products coexist), is representative in the majority of PC Intel is able to decrease the cost per transistor with each and server chips. Network effects have played a big role successive technology node. This fundamental realization in its dominance, as proprietary computer software has is at the core of Intel’s one- to two-year lead over the rest been written specifically for the x86 architecture, leading of the chip industry. We believe Intel’s moat is to significant switching costs to shift architectures. The encapsulated in its "tick-tock" strategy, in which the firm growth in the PC market allowed Intel to invest heavily in advances its technology node every two years (the tick), R&D to fuel continued progress in the x86 architecture. while it launches a new architecture for its However, with the PC market stagnating and ARM microprocessors during the years in between (the tock). architecture exhibiting a commanding lead in mobile devices, x86 has continued to flourish in server processors, Server processors are manufactured with the same as x86-based server revenue accounted for 82% of the technology and many identical process steps as chips total server market in 2014, according to Gartner. ARM designated for PCs. Therefore, we believe that as the has announced plans to enter the server market by way product mix offered by Intel shifts from the PC to servers, of microservers, a class of server tailored for energy there will be minimal requirement to overhaul any portion efficiency, which results in a smaller footprint and lower of wafer fabrication equipment. Generally, server total cost of ownership relative to traditional servers. processors favor performance over power efficiency, Intel’s Atom processors are incumbent in today’s which we believe is Intel’s forte and justifies its strong microservers, and we believe the x86 ecosystem coupled presence in the market. However, different classes of data with the newer versions of the Atom developed with centers have separate needs, and the potential for 14-nanometer technology will thwart offerings by ARM. ARM-based server chips making a push into microservers is a plausible scenario. We see the lessons learned by Valuation Intel in mobile carrying over across other domains, as its Abhinav Davuluri, Analyst, 09 April 2015 Atom chips for microservers are now much more energy Our fair value estimate is $31 per share, up from $29 as efficient than the Haswell and Broadwell variations. we take into account slightly higher revenue projections for the data center group. As the PC market continues to While previous mobile processor efforts have failed to decline, we see server processors supplanting sales in PC make a meaningful impact, Intel has yet to fully exert its processors, ultimately leading to overall revenue growth manufacturing prowess on a market laden with ARM in the mid-single-digits in the near-term. As a relatively © 2015 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained ? herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. See last page for important disclosures. Morningstar Equity Analyst Report|Page 3 of 12 Intel Corp INTC (XNAS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQ 27.53 USD 31.00 USD 0.89 3.43 130.88 Semiconductors Standard 20 Aug 2015 20 Aug 2015 20 Aug 2015 20 Aug 2015 smaller growth driver, we believe mobile chip sales will is in tailoring its processors to new markets. Our be approximately 5% of revenue by 2018, after uncertainty rating is medium and reflects the underlying representing a nominal percentage in 2014. risk faced by Intel regarding the proliferation of mobile devices at the expense of personal computers, the The PC market experienced a temporary revival in 2014 expanding role of server processors in its product mix, and with a 6% revenue increase stemming from an enterprise the advancement of technology nodes to 10-nanometer, refresh. In the near-term, we see Intel’s PC-derived 7-nanometer, and so on. In the PC space, any misstep by revenue declining in the low-single-digits. However, the Intel will lead to AMD capturing market share. While it is proliferation of cloud computing and big data trends will more likely that ARM-based processors could begin to provide tailwinds for the data center group, which we see steal server market share from Intel, it is also theoretically growing by about 13% annually until 2019. By then, we possible ARM processing power catches up to Intel core believe the PC and data center groups will converge in processors. Any prolonged delay in process technology by percentage of total revenue, with both accounting for Intel would allow other semiconductor manufacturers to about 40% each. quell Intel’s lead and offer processors at the same node as Intel or even surpass it. Intel’s lead in process technology benefits from sizable R&D expenses (20% of revenue on average) and we Management believe this rate must continue to sustain its advantage. Abhinav Davuluri, Analyst, 16 January 2015 Gross margins in 2014, at almost 64%, benefited from We view Intel's stewardship of shareholder capital as higher desktop and notebook unit sales as well as higher standard. Brian Krzanich took over as CEO in May 2013 average selling prices in the data center group. Going from Paul Otellini, who retired. Krzanich was previously forward, we believe lower ASPs for PC chips will be COO and has been with the firm since 1982. Before partially offset by increasing unit sales of server chips, becoming COO in January 2012, he held leadership which as a segment have gross margins in excess of 70%. positions in Intel's manufacturing organization. Stacy As Intel shifts its focus toward server and mobile chips, Smith became CFO in 2007. Smith joined Intel in 1988 and utilization of its fabrication plants will become more has held various positions at the company, including efficient, which will alleviate margin depression from finance, information technology, and sales and marketing PC-related headwinds. Operating margins were relatively roles. Former CFO Andy Bryant remains at Intel and is now high in 2014 (28%) mainly attributed to strong PC and chairman of the board. We consider the firm to have a server chip sales, but we see margins normalizing to 25% deep management bench. in the long run. Management has made the right moves to allow Intel to Intel's dominant manufacturing operations require maintain its dominant position in computer processors in massive capital outlays for expensive equipment, recent years, but the success of the firm's recent forays fabrication plant construction, and the maintenance of a into new markets is still up for debate. Intel has been clean room environment. Our estimates utilize historical making a concerted effort to break into smartphone and patterns and the expected progression of Moore's law to tablet processors, which has traditionally been the attain an average capital expenditure of $10.75 billion in stronghold of ARM, with its Atom chips, and even paid the near term. Approximately 70% of this outlay is for $1.4 billion to acquire Infineon's wireless connectivity chip maintaining existing capacity, with the rest split between business in 2011 to support the endeavor. Although Intel process development and wafer size transition from 300 has seen limited success so far, there are signs that it is millimeters to 450 in order to have more chips on a sole starting to make some progress on that front. In addition, substrate to mitigate cost challenges with 10-nanometer Intel acquired antivirus and security software maker and beyond. McAfee for $6.7 billion (net of cash) in 2011, with the vision of adding security features to its chips and Risk hardware, which when integrated with software will Abhinav Davuluri, Analyst, 21 August 2015 provide more effective security solutions. Although The cyclical industry in which Intel operates will cause its strategically sound, we think it remains to be seen whether profitability to fluctuate regardless of how successful it Intel can successfully execute its vision for McAfee. © 2015 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained ? herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. See last page for important disclosures. Morningstar Equity Analyst Report|Page 4 of 12 Intel Corp INTC (XNAS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQ 27.53 USD 31.00 USD 0.89 3.43 130.88 Semiconductors Standard 20 Aug 2015 20 Aug 2015 20 Aug 2015 20 Aug 2015 © 2015 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained ? herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. See last page for important disclosures. Morningstar Equity Analyst Report|Page 5 of 12 Intel Corp INTC (XNAS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQ 27.53 USD 31.00 USD 0.89 3.43 130.88 Semiconductors Standard 20 Aug 2015 20 Aug 2015 20 Aug 2015 20 Aug 2015 Shares of Intel rose in after-hours trading after the firm Analyst Notes Archive reported solid second-quarter results and even better guidance relative to expectations. Seasonally a rough Micron and Intel Joint Venture Announce 3D XPoint period for personal computer sales, Intel's second quarter Memory; Maintain Very High Uncertainty for featured better-than-projected client computing group Micron performance, while the data center group continued its recent streak of year-over-year growth. Management also Abhinav Davuluri, Analyst, 28 July 2015 IM Flash (the NAND joint venture between Micron and shed light on an updated product roadmap that will have Intel) announced on July 28 a new development in memory implications across the semiconductor landscape. Our fair technology called 3D XPoint (cross-point), which is value estimate of $31 for this wide-moat firm is intact, as projected to be up to 1,000 times faster than current NAND we believe the current share price accurately reflects flash technologies and 10 times denser than today’s Intel's prospects. DRAM products. As a result, shares of Micron rose about 9%, closing in on $20 per share. Although shares are in Second-quarter revenue was $13.2 billion, up 3% 4-star territory, we reiterate our very high uncertainty sequentially due to strength in the data center, but down relative to the volatile memory space in addition to our 5% from the same period in 2014 because of weaker PC view that Micron will not begin materially recovering until sales. The client computing group, which encompasses early 2016. the PC and mobile groups, had revenue of $7.5 billion, which was surprisingly up 2% from last quarter. Of note 3D XPoint is slated to be the latest class of memory since was desktop platform average selling prices up 6% from the 1989 introduction of NAND flash memory. While last year due to a stronger product mix skewed to production has already begun in the joint venture’s higher-end core i7 processors. The data center group had dedicated fabrication plant in Lehi, Utah, commercial revenue of $3.9 billion as platform volume and ASPs rose shipments aren’t expected until 2016. Previously, it was 10% and 5%, respectively. Even amid a difficult quarter, announced that the latest 3D NAND would also ramp in we were impressed by the 200-basis-point increase in 2016. We see the potential for cannibalization in certain gross margin, primarily due to lower start-up costs, higher memory markets, primarily in functions that require a ASPs, and fewer 14-nanometer write-offs for poorly massive in-memory database, fast system recovery, low processed wafers. We believe this shows how Intel's latency, and high endurance. High-performance 14-nanometer process technology has matured to the computing is the primary target application, including point that we can see incremental gross margin expansion high-fidelity pattern recognition (facial, speech, as challenges encountered during the initial ramp subside. biometrics, etc.) but there is also the potential for more advanced gaming and scientific uses that need to access Intel to Acquire Altera Amid Wave of Semiconductor immense amounts of data at high speeds. Consolidation Abhinav Davuluri, Analyst, 02 June 2015 With respect to the technology itself, IM Flash On June 1, Intel and Altera confirmed the deal for the representatives described the cost for 3D XPoint to be former to purchase the latter for $54 per share, or somewhere between that of NAND and DRAM. 3D XPoint approximately $16.7 billion. The agreed-upon price sues a crosspoint structure that allows denser packing, in represents a 56% premium to where Altera traded before addition to newer materials with unique properties that the initial report of a potential deal on March 27 by The are able to store memory in a fundamentally different way Wall Street Journal. We maintain our wide and narrow than current memory products. The proposed moat ratings for Intel and Altera, respectively, and expect specifications look impressive at face value, but we are the deal to clear regulatory hurdles after being approved reluctant to significantly recognize additional growth on by both companies' boards. It is expected the acquisition just this announcement. will close within six to nine months while being accretive to Intel's earnings per share and free cash flow in the Intel Beats Expectations, but Updated Product subsequent year. Roadmap Is Real Story; Shares Fairly Valued Accounting for Altera's net cash of about $2.4 billion, the Abhinav Davuluri, Analyst, 16 July 2015 © 2015 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained ? herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. See last page for important disclosures. Morningstar Equity Analyst Report|Page 6 of 12 Intel Corp INTC (XNAS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQ 27.53 USD 31.00 USD 0.89 3.43 130.88 Semiconductors Standard 20 Aug 2015 20 Aug 2015 20 Aug 2015 20 Aug 2015 purchase price is reduced to $14.3 billion. The acquisition over the course of multiple quarters, and we believe there is to be financed with cash on hand as well as new debt. will be conditional performance milestones that must be Based on Intel's current capital structure, the current low met by ASML for each subsequent delivery. Intel has interest rate environment, and the fact that only $2.3 already begun early production of 10-nanometer billion cash and investments is domiciled in the United technology and has publicly stated EUV will not be States, we believe Intel will finance the deal roughly implemented until 7-nanometer, which would likely be evenly between cash on hand and new debt. fully ramped by 2018 depending on development challenges. Although this announcement offers some Relative to our discounted cash flow-based fair value visibility for EUV adoption which should serve as a growth estimate of $41 per share, Altera shareholders are being driver for ASML, we feel our annual growth projection of well compensated, especially after reportedly rejecting 10% is appropriate for the current market landscape. the same offer a few months prior. At first glance, the premium paid by Intel, a company with $55.9 billion in Satisfactory First Quarter for Intel, Capital Outlays sales in 2014 (compared with $1.9 billion for Altera during Lower on Weak PC Demand; FVE Unchanged the same period), appears excessive. However, as M&A Abhinav Davuluri, Analyst, 15 April 2015 activity has heated up recently in the semiconductor Intel's first-quarter results arrived in line with its lowered industry, we believe this premium is justified amid an guidance amid a difficult landscape for personal environment devoid of material growth. We expect to computers, especially in the enterprise segment. Although increase our $31 fair value estimate for Intel as additional the firm forecasted flat revenue for the year, we were details come to light. pleased with the lower capital spending budget, now at $8.7 billion from $10 billion previously, to better align Extreme Jump in ASML Share Price After Major capacity with demand. We think this bodes well for Intel Extreme Ultraviolet Tool Order going forward as it shows the ability to tactically adapt to Abhinav Davuluri, Analyst, 23 April 2015 challenging environments. Additionally, revenue from ASM Lithography sent shockwaves through the server chips exceeded our expectations and continues to semiconductor industry on April 22, announcing that it had be a key growth driver. At this point, we maintain our $31 signed an agreement with a major U.S. customer to fair value estimate and wide economic moat rating. provide at least 15 extreme ultra-violet lithography tools for advanced manufacturing technologies. On the heels First-quarter revenue for Intel was $12.8 billion, down 13% of the announcement, ASML shares shot up 10%, as the sequentially and flat year-over-year. Intel’s newly titled market applauded the progress. Although the firm did not client computing group, which combines the mobile and confirm a particular customer, two particular facts PC groups, had revenue of $7.4 billion, down 8% strongly support Intel being the aforementioned. The year-over-year as desktop volumes were down 16% on NXE:3350, ASML’s fourth-generation EUV system, is listed lower enterprise demand. Data center revenue was up at EUR 95 million (approximately $102 million) which 19% year-over-year, with unit volumes up 15% and would make it a hefty capital outlay that only a handful average selling prices up 5% as cloud growth accelerates. of manufacturers, like Intel, could afford. Furthermore, in Gross margin was down 4.9% sequentially to 60.5% due 2012 Intel made a $4.1 billion investment to support to higher unit costs stemming from a higher mix of research and development of ASML’s EUV endeavors, 14-nanometer product, lower platform volumes, and giving it a sizeable vested interest in its proliferation. At higher factory start-up costs. Diluted EPS was $0.41, up this point in time, we reiterate our fair value estimate of 8% from a year ago, thus illustrating solid growth driven $82 per share, as we would like further color on the by strong server demand. arrangement before considerably changing our valuation. Management outlined their logic behind the cut in capital During its first-quarter call, ASML noted its EUV shipment expenditures and lower second quarter guidance as target for 2015 was six, with Taiwan Semiconductor reacting to inventory depletion in the PC supply chain in having previously committing to two, Intel potentially preparation for the release of Microsoft’s Windows 10 another two, and perhaps Samsung the remainder. Tools operating system and Intel’s Skylake microarchitecture in of this magnitude are generally incrementally shipped the second half of 2015. The combination of lower © 2015 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained ? herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. See last page for important disclosures. Morningstar Equity Analyst Report|Page 7 of 12 Intel Corp INTC (XNAS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQ 27.53 USD 31.00 USD 0.89 3.43 130.88 Semiconductors Standard 20 Aug 2015 20 Aug 2015 20 Aug 2015 20 Aug 2015 expected capital investment and full year gross margin Defense Council estimated that, in 2013, nearly three (61% versus prior guidance of 62%) leave our free cash percent of all power in the United States was consumed flow estimate relatively intact despite a tough start, as by data centers. As a result, we see Intel’s server we expect a stronger second half, especially in the PC customers looking to reduce the total cost of ownership segment. by reducing power consumption. Programmable logic devices, such as those offered by Altera, can be integrated PC Unit Trends Come in a Bit Better Than Expected with server chips, not only to allow developers to in 1Q, but Faced Tough Year-Over-Year Comps reconfigure the chip's functionality, but also reduce power Peter Wahlstrom, Analyst, 10 April 2015 consumption by running applications more optimally. Due During the first quarter, personal computer unit sales fell to the prior experience working together, we think there 6.7% year over year, according to IDC, as shipments are synergies that can be unlocked with an acquisition. slipped below 69 million units for the first time in five For now, we maintain our fair value estimates, economic years. The drop was widely expected, though, particularly moat, and moat trend ratings for both Intel and Altera. following last year's Windows XP refresh, so we're not placing outsize emphasis on the April 9 release. As customers seek more customized solutions in server chips, working with a PLD designer is the next logical step. That said, our long-term outlook for PCs is unchanged, and Intel has already begun the collaboration, but may find a we assume that mobile devices in general will continue complete acquisition as making more strategic sense, to pressure PC volumes, as smartphone and tablet global since it would be able to incorporate Altera’s research and penetration rates are still low relative to PCs. There were development with its own efforts. Intel’s last major a few challenges within certain product categories this acquisition, McAfee in 2011, was an all-cash deal, and at quarter (notably Windows Bing-based notebooks), and the end of the fourth quarter, Intel reported $14.1 billion we're cognizant of extraneous macro factors such as in cash, short-term investments, and trading assets. currency fluctuations and mixed GDP data. We haven't However, with only $2.3 billion cash and investments yet seen widespread cautious commentary out of the domiciled in the U.S, it is likely Intel would take on global PC supply chain players (only in select areas), but additional debt. we're keeping an eye out for potential signs of incremental weakness. Intel Tempers 1Q Guidance Amid Weaker PC Demand, Lower Inventory Levels, and Currency On the plus side, PC shipments in the U.S. market were Headwinds relatively strong, down only 1% year over year (to 14.2 Peter Wahlstrom, Analyst, 12 March 2015 million units). Hewlett-Packard, the current market leader Intel on March 12 lowered its guidance for first-quarter in the region with 28% share, was the clear winner this revenue primarily as a result of weaker-than-expected quarter, as its shipments jumped by nearly 400,000 to 4 demand across the embattled PC space. The company million units, up 9.8% versus the prior year. Shipments at cited a subsequent reduction in inventory throughout the Dell and Toshiba dropped an estimated 4% and 21%, PC supply chain as an additional reason, which we believe respectively, while others (19% of the U.S. market) fell is partially a consequence of holiday-associated 9%. production limitations in Asia, meaning that solid fourth-quarter 2014 results may have come at the expense Intel Speculated to be in Talks to Purchase Altera; of first-quarter 2015 performance. This would have been Maintaining Our Fair Value Estimate, for Now contemplated in the initial revenue guidance range that Peter Wahlstrom, Analyst, 29 March 2015 management set in January, though. The other segments Media reports circulating late Friday suggested that Intel of the company, including the data center group, which is in talks on a potential acquisition of Altera. Investors has been the key growth driver, are performing as drove Altera's shares 28% higher on this news. While no expected. Furthermore, currency headwinds mainly terms or time frame were released, and the potential attributed to Europe (with the euro hitting a 12-year low remains that a deal won’t materialize, we believe an versus the U.S. dollar) surely factor into the guidance Intel-Altera combination would provide benefits mainly in revision, as a weaker euro provides a considerable Intel’s data center segment. The Natural Resources hindrance to sales in the region. At this point, a quarterly © 2015 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained ? herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. See last page for important disclosures. Morningstar Equity Analyst Report|Page 8 of 12 Intel Corp INTC (XNAS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Dividend Yield % Market Cap (Bil) Industry Stewardship QQQQ 27.53 USD 31.00 USD 0.89 3.43 130.88 Semiconductors Standard 20 Aug 2015 20 Aug 2015 20 Aug 2015 20 Aug 2015 warning does not materially affect our fair value estimate or wide economic moat rating, but we suggest investors seek a more enticing entry point. Revenue was guided downward to a midpoint of $12.8 billion, which is a sizable revision (down 6%) relative to an initial guidance of $13.7 billion. Our internal model had taken into account a normalization in the revenue derived from the PC group, albeit not to the extent indicated by the lower guidance. Specifically, the refresh cycle for small and midsize businesses upgrading Windows XP systems (a key driver for PC group outperformance in 2014) is diminishing. With respect to profit, Intel maintained gross margin of 60% plus or minus a few hundred basis points justified by the fact that lower volumes are offset by higher average selling prices. © 2015 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained ? herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. See last page for important disclosures. Quantitative Equity Report | Release Date: 21 August 2015 | Reporting Currency: USD | Trading Currency: USD PaPgaeg 9e o 1f 1o2f 1 Intel Corp INTC Last Close Quantitative Fair Value Estimate Market Cap (Bil) Sector Industry Country of Domicile 26.56 32.24 130.9 aTechnology Semiconductors USA United States Intel Corporation is a semiconductor chip maker. It develops Price Versus Quantitative Fair Value integrated digital technology products like integrated circuits, 2011 2012 2013 2014 2015 2016 for industries such as computing and communications. Sales/Share Quantitative Fair Value Estimate Forecast Range 50 Forcasted Price Total Return Dividend Quantitative Scores Scores 40 Split All Rel Sector Rel Country Momentum: Negative Quantitative Moat Wide 100 100 100 30 Standard Deviation: 21.08 Valuation Undervalued 54 56 63 Quantitative UncertaintyMedium 99 100 98 20 Financial Health Strong 88 78 88 26.56 52-Wk 37.90 10 INTC 17.60 5-Yr 37.90 aUSA 19.0 -11.4 30.2 43.3 -24.8 Total Return % Undervalued Fairly Valued Overvalued 17.4 -27.6 -2.9 30.4 -25.2 +/– Market (Morningstar US Index) 3.23 4.22 3.47 2.48 3.43 Dividend Yield % 10.5 9.7 14.0 17.3 11.7 Price/Earnings 2.6 2.0 2.5 3.4 2.5 Price/Revenue Valuation Sector Country Current 5-Yr Avg Median Median Undervalued Price/Quant Fair Value 0.85 0.92 0.87 0.89 Fairly Valued Price/Earnings 11.7 13.1 20.5 20.4 Overvalued Forward P/E 11.4 — 15.1 15.0 Price/Cash Flow 7.1 7.1 13.4 11.9 124,864 Monthly Volume (Thousand Shares) Price/Free Cash Flow 12.6 13.7 19.2 18.7 Liquidity: High Dividend Yield % 3.43 3.28 1.91 2.24 Price/Book 2.3 2.5 2.0 2.4 2010 2011 2012 2013 2014 TTM Financials (Fiscal Year in Mil) Price/Sales 2.5 2.6 1.4 1.8 43,623 53,999 53,341 52,708 55,870 55,251 Revenue 24.2 23.8 -1.2 -1.2 6.0 -1.1 % Change Profitability Sector Country 15,588 17,477 14,638 12,291 15,347 14,504 Operating Income Current 5-Yr Avg Median Median 172.9 12.1 -16.2 -16.0 24.9 -5.5 % Change Return on Equity % 20.0 22.6 11.6 11.9 11,464 12,942 11,005 9,620 11,704 11,676 Net Income Return on Assets % 12.8 15.3 6.1 4.8 16,692 20,963 18,884 20,776 20,418 19,319 Operating Cash Flow Revenue/Employee (K) 517.8 517.9 358.3 304.6 -5,207 -10,764 -11,027 -10,747 -10,197 -8,472 Capital Spending 11,485 10,199 7,857 10,029 10,221 10,847 Free Cash Flow Quantitative Moat Score 26.3 18.9 14.7 19.0 18.3 19.6 % Sales 110000 2.01 2.39 2.13 1.89 2.31 2.36 EPS 161.0 18.9 -10.9 -11.3 22.2 2.1 % Change 80 2.02 1.83 1.52 2.16 1.91 2.19 Free Cash Flow/Share 0.63 0.78 0.87 0.90 0.90 0.93 Dividends/Share 60 8.97 9.22 10.36 11.16 11.81 12.14 Book Value/Share 5,000 4,944 4,967 4,748 4,754 4,754 Shares Outstanding (Mil) 40 Profitability 20 25.2 27.1 22.7 17.6 20.5 20.0 Return on Equity % 19.7 19.3 14.2 10.9 12.7 12.8 Return on Assets % 0 26.3 24.0 20.6 18.3 20.9 21.1 Net Margin % 2008 2009 2010 2011 2012 2013 2014 2015 0.75 0.80 0.69 0.60 0.61 0.61 Asset Turnover 1.3 1.5 1.6 1.6 1.6 1.6 Financial Leverage Financial Health Sector Country 65.3 62.5 62.1 59.8 63.7 63.5 Gross Margin % Current 5-Yr Avg Median Median Distance to Default 0.8 0.8 0.6 0.6 35.7 32.4 27.4 23.3 27.5 26.3 Operating Margin % Solvency Score — — 462.2 566.5 2,077 7,084 13,136 13,165 12,107 12,116 Long-Term Debt Assets/Equity 1.6 1.5 1.6 1.7 49,430 45,911 51,203 58,256 55,865 57,695 Total Equity Long-Term Debt/Equity 0.2 0.2 0.1 0.3 2.5 2.6 2.1 1.8 1.7 1.7 Fixed Asset Turns Growth Per Share Quarterly Revenue & EPS Revenue Growth Year On Year % 1-Year 3-Year 5-Year 10-Year Revenue (Mil) Mar Jun Sep Dec Total Revenue % 6.0 1.1 9.7 5.0 2015 12,781.0 13,195.0 — — — 8.0 7.9 Operating Income % 24.9 -4.2 21.9 4.2 2014 12,764.0 13,831.0 14,554.0 14,721.0 55,870.0 6.4 Earnings % 22.6 -1.1 24.5 7.2 2013 12,580.0 12,811.0 13,483.0 13,834.0 52,708.0 2.6 Dividends % 0.0 4.8 9.9 18.9 2012 12,906.0 13,501.0 13,457.0 13,477.0 53,341.0 1.5 0.2 0.1 Book Value % 0.4 9.3 9.3 6.7 Earnings Per Share Stock Total Return % -21.7 3.9 10.3 2.7 2015 0.41 0.55 — — — 2014 0.38 0.55 0.66 0.74 2.31 -5.1 -4.6 2013 0.40 0.39 0.58 0.51 1.89 2013 2014 2015 2012 0.53 0.54 0.58 0.48 2.13 ©co2n0ta1i5n eMd ohrenrienigns tisa rn. oAtl lr eRpigrehstes nRteesde orvr ewda. rUrannletessd ototh beerw aicsceu rpartoev,i dceodrr einc ta, csoempaprlaettee ,a ogrr etiemmeelyn.t ,T yhoisu rmepaoyr tu sise ftohri sin rfeoprmorat toionnly p iunr tphoes ecso uonntlryy, iann wd hshicohu iltds noortig binea clo dnissitdriebruetdo ra i ss oblaicsietadt.i oDna ttao absu yo roirg isnealll lay nrye psoerctuerdit. yT.h Ree idnifsotrrimbuattiioonn ß® is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. MMMooorrrnnniiinnngggssstttaaarrr EEEqqquuuiiitttyyy AAAnnnaaalllyyysssttt RRReeepppooorrrttt|Page 10 of 12 Morningstar Equity Research Methodology Fundamental Analysis ward the firm’s cost of capital more quickly than compa- At Morningstar, we believe buying shares of superior nies with moats will. We have identified five sources of businesses at a discount and allowing them to com- economic moats: intangible assets, switching costs, pound over time is the surest way to create wealth in network effect, cost advantage, and efficient scale. the stock market. The long-term fundamentals of busi- nesses, such as cash flow, competition, economic cy- Fair Value Estimate cles, and stewardship, are our primary focus. Occa- Our analyst-driven fair value estimate is based primari- sionally, this approach causes our recommendations to ly on Morningstar’s proprietary three-stage discounted appear out of step with the market, but willingness to cash flow model. We also use a variety of supplemen- be contrarian is an important source of outperfor- tary fundamental methods to triangulate a company’s mance and a benefit of Morningstar’s independence. worth, such as sum-of-the-parts, multiples, and yields, Our analysts conduct primary research to inform our among others. We’re looking well beyond next quarter views on each firm’s moat, fair value and uncertainty. to determine the cash-generating ability of a company’s assets because we believe the market price of a securi- QQQQQ QQQQ ty will migrate toward the firm’s intrinsic value over QQQ QQ time. Economic moats are not only an important sorting Q Fundamental Economic Fair Value Uncertainty Star mechanism for quality in our framework, but the desig- Analysis Moat Rating Estimate Assessment Rating nation also directly contributes to our estimate of a company’s intrinsic value through sustained excess re- Economic Moat turns on invested capital. The economic moat concept is a cornerstone of Morn- ingstar’s investment philosophy and is used to distin- Uncertainty Rating guish high-quality companies with sustainable com- The Morningstar Uncertainty Rating demonstrates our petitive advantages. An economic moat is a structural assessment of a firm’s cash flow predictability, or valu- feature that allows a firm to sustain excess returns ation risk. From this rating, we determine appropriate over a long period of time. Without a moat, a compa- margins of safety: The higher the uncertainty, the wider ny’s profits are more susceptible to competition. Com- the margin of safety around our fair value estimate be- panies with narrow moats are likely to achieve normal- fore our recommendations are triggered. Our uncertain- ized excess returns beyond 10 years while wide-moat ty ratings are low, medium, high, very high, and ex- companies are likely to sustain excess returns beyond treme. With each uncertainty rating is a corresponding 20 years. The longer a firm generates economic profits, set of price/fair value ratios that drive our recommen- the higher its intrinsic value. We believe lower-quality dations: Lower price/fair value ratios (<1.0) lead to pos- no-moat companies will see their returns gravitate to- itive recommendations, while higher price/fair value Economic Moat COMPETITIVE FORCES WIDE NARROW NONE COMPANY PROFITABILITY Moat Sources: Intangible Switching Network Cost Efficient Assets Costs Effect Advantage Scale © 2015 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. The information contained ? herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. See last page for important disclosures.