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Intel Beefs Up Spending To Stiff-ARM Chip Competitors

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Intel released its fourth-quarter and full-year 2011 earnings last week, finishing a record year with almost $54 billion in revenues despite economic headwinds and threats of cannibalization of PCs by tablets.

While the Atom chip performed poorly due to a decline in netbook sales, Intel’s traditional PC and server business continued its growth despite weakness in developed markets.

Its is perhaps this confidence as well as the threat of ARM-based players such as Nvidia entering the PC market soon, that is encouraging Intel to increase its capital spending even more in 2012. Intel will spend close to $12.5 billion in 2012 on property and equipment, its highest ever capital expenditure for a single year. Intel already has lead against AMD in terms of process technology and wants to maintain that.

Our price estimate for Intel stands at $29, implying a premium of around 10% to the market price.

See our complete analysis for Intel

It is notable that from 2007 to 2010, Intel’s capital expenditure averaged $5 billion and during this period, little threat existed to the PC market. In 2010, tablets entering the market and Intel decided to almost double its capital expenditure to $10.8 billion in 2011. Intel is basically trying to get further ahead of AMD in terms of process technology and thus make most of the modest PC market growth in upcoming years in our view.

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The 2012 capital expenditure will primarily be to set up a factory for 14nm chips.

The stock is quite sensitive to capital spending as it amounts to a significant proportion of Intel’s sales. Currently we forecast this figure to increase to more than 23% of sales in 2012 and subsequently come down to about 15% of sales, a level close to what has existed historically.

However if Intel’s capital expenditure remain on a higher side of about 19% as the the company battles against increasing competition and cannibalization of PC market, this implies around 10% downside to our price estimate.

We are revising our Intel model, which will soon be available.

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