For Intel (NASDAQ:INTC) CEO and President Paul Otellini, preserving the status quo will never be good enough. After 38 years at Intel — and nearly a decade as president and CEO — he still gets excited about the limitless possibilities posed by computing’s next frontier. Otellini’s success in leading Intel toward that “undiscovered country” will determine his company’s legacy and shareholder returns.
Otellini’s faith in his industry’s future is grounded in Moore’s Law.
Three years before the visionary Dr. Gordon Moore co-founded Intel with fellow engineers Dr. Robert Noyce and Dr. Andy Grove, Moore made this bold prediction in an April 1965 edition of Electronics magazine: The number of transistors on a computer chip will double about every two years.
The Caltech wizard made that prediction while the troika was at Fairchild Semiconductor (NYSE:FCS). The theory launched a paradigm shift in integrated-circuit-chip technology.
Although Moore now believes his law is dead, Otellini holds that there are new creative processes on the horizon that will cause paradigm shifts just as great as those Moore foresaw nearly a half-century ago.
“Moore’s Law is not about science — it’s about the human need to innovate,” Otellini said in a keynote address at this year’s Computer Electronics Show. “It’s the same kind of innovative spirit that put a man on the moon…. Today your smartphone has more computing power than existed in all of NASA in 1969.” Over the decades, Intel has been able to maintain that pace of innovation through technology advances.
Otellini values the complex engineering vision that Noyce, Moore and Grove brought to Intel as the company’s first three CEOs. Intel’s fourth CEO, Craig Barrett (whom Otellini succeeded in that job), was a guru in materials science and engineering who once taught at Stanford.
But Otellini was no engineer. He earned a bachelor’s degree in economics at the Jesuit-run University of San Francisco and an MBA at Berkeley’s Haas School of Business. Raised in a devoutly Catholic home, Otellini and his brother were steered by their father toward the priesthood. Steven accepted the call; Paul took another path.
That’s why, on the surface, Otellini might not appear to have been the obvious choice to follow in the footsteps of four technology and engineering legends. But Otellini had something that would prove invaluable to Intel: the marketing savvy to take the company to the next level.
As an Intel marketer in charge of the IBM (NYSE:IBM) relationship in 1980, Otellini persuaded Big Blue to use Intel microprocessors in its new line of personal computers. A decade later, he oversaw development of the Pentium chip, successfully managing the processor’s early glitches and the attendant PR blowback.
But by the time Otellini took over the job of president and COO in 2002, Intel’s outlook was grim. The dot-com bubble had burst, 9/11 and corporate scandals had thrown markets into turmoil and Intel, which had a 2001 market cap of $203 billion, lost $96 million in market value by the end of 2002.
Otellini did more than refocus Intel on its silicon microprocessor strengths — he pointed the company toward multifunctional chips that had integrated communications capabilities. For example, the Centrino strategy integrated a chipset, a mobile processor and a wireless network interface into a laptop.
Barrett retired in 2005, and Otellini stepped into the CEO job at another challenging time for Intel: There was slowing demand for high-end microprocessors and rising competition. Rival chipmaker Advanced Micro Devices (NYSE:AMD) had filed an antitrust lawsuit against Intel, charging unfair competition. That suit kicked around the courts until 2009, when Intel settled with AMD for $1.25 billion.
But in his biggest fumble, Otellini reorganized the company’s products into market-specific groups, hiring thousands of new employees to support the venture. Disappointing earnings forced Otellini to restructure Intel again in 2006, and cost-cutting measures resulted in the layoff of some 10,000 employees.
The Great Recession dealt Intel another blow: Shares slipped under $12 in February 2009, but Otellini’s restructuring and cost-cutting were working. By the end of that year, Intel had saved nearly $5 billion and its Atom processors were a key part of the company’s multi-device strategy, which included deals with mobile companies such as LG Electronics and Nokia (NYSE:NOK).
Intel shares began a strong comeback. At a little over $28, INTC is up 48% since its 52-week low last August. In January the company reported record revenue 2011 of $54 billion and record earnings of $12.9 billion.
Still, analysts expect disappointing earnings when Intel reports its first-quarter numbers on April 17. Wall Street expects a 10.7% drop in Intel’s net income over the same quarter last year, Forbes reports.
Regardless of any short-term setback, Otellini has four aces up his sleeve that can keep Intel’s shares soaring:
Intel has put up $300 million to support the proliferation of these ultra-light, highly functional, fast-boot-up laptops. Lenovo (PINK:LNVGY) took advantage of the CES show to debut its IdeaPad Yoga, which has a touchscreen display that can flip into a tablet. Intel predicted there will be $699 Ultrabooks available for back-to-school shoppers. And 75 new Ultrabook designs are on the way.
The Intel Smartphone
The smartphone has an Atom 1.6GHz dual-core processor that runs Google’s (NASDAQ:GOOG) Android operating system. Lenovo will be the first manufacturer to launch one — its K800 will roll out first in China and is expected to ship in the second quarter.
The Motorola Mobility Partnership
Intel and Motorola Mobility (NYSE:MMI) have inked a multi-year, multi-device strategic relationship that includes Atom-processor-based Android smartphones that Motorola will begin shipping later this year. At CES, Otellini said “the best of Intel computing is coming to smartphones.” Why? Because consumers’ focus has shifted from “the personal computer to personal computing.”
Intel is expected to launch its greatly anticipated 3D Ivy Bridge chip on April 23, according to CNET. The robust-yet-power-efficient chips are expected to end up in Apple’s (NASDAQ:AAPL) thinner MacBook Pro and MacBook Air.
Intel exec Kirk Skaugen even hinted at the company’s developer forum in China on Thursday that the Ivy Bridge chips will be “retina display capable” — a reference to Apple’s high-resolution display on the new iPad, reports PC Magazine.
The bottom line: “We’re excited about creating the future of computing,” Otellini said in his CES keynote. He has good reason to be. Intel is the 800-pound gorilla in this space — and is an innovator to boot.
INTC has a market cap of more than $142 billion, a price-to-earnings growth (PEG) ratio of only 0.9 (indicating it’s slightly undervalued), a current dividend yield of 3% and a one-year return of 49%.
Otellini may have been paid nearly $17.5 million last year, but he’s delivering better results than a lot of his peers. At around $28.50, I think Intel stock isn’t just a buy — it’s a bargain.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.