Intel Corp. (INTC) is the largest maker of computer chips in the world, with record sales of $56 billion last year.
So is its $17 billion purchase of chipmaker Altera Corp. (ALTR) a big deal?
Yes.
It’s certainly not a mega-deal, or a game-changer. The Avago Technologies (AVGO) $37 billion deal for Broadcom (BRCM) was certainly a lot bigger. But the Intel-Altera deal is important because it accomplishes two things for INTC at once: a quick move into a fast-growing sector; and for the long term, it should enhance the value of of its key growth targets.
The Altera acquisition has been on the table for months because INTC is interested in the data center segment, where Altera is a key player. INTC saw its data center revenue up almost 20% in its most recent quarter, while revenue from its sales of PC processors were flat.
This was a strategic move to grab a sector that was going to help INTC’s bottom line in coming quarters, not coming years. It helps stem the bleeding as companies keep capital expenditures for new equipment tight and consumers are transitioning to smartphones from multiple devices.
Also, Altera gives INTC exposure in the communications sector, a key long-term goal. INTC missed the mobile revolution, choosing to stick with CPUs and laptops. Trying to make a move after the mobile switch had begun would have been very risky and if unsuccessful, and could have meant the end of INTC.
Instead, the company leapfrogged mobile and began to moving into the Internet of Things (IoT) space. This is the tech that makes everything smart — your toaster, your car, your washing machine, your house.
And it’s made some massive inroads here, becoming the chipmaker of choice for many companies building smart products. Altera has a major division focused on communication chips, which will be a very strategic asset long term for INTC.
Also, Altera and Intel have been working together for quite a while — that’s why INTC stayed at the bargaining table for months trying to find a way for an amicable acquisition rather than simply making a hostile bid. Altera adds a specialized server acceleration technology that provides a performance boost to Intel chips, which will help the merged company expanding into storage-rich markets.
Finally, Altera products generally have higher margins than INTC products, and that will help the bottom line in the short and long term.
INTC has been around since 1968 and, you could argue, started the entire computer age. It has seen a few things over the years and knows how to survive.
It appears there’s a consolidation going on the semiconductor space right now, with big companies looking to add specialized chipmakers to their ranks rather than spend enormous amounts of money on chip foundries that may not pay off in the long run.
As long as the economy is iffy, it makes more sense to buy into the strategic sectors you want exposure to now and wait for growing demand before committing significant resources.
INTC is up more than 20% in the past year, much better than many of its compatriots, and it kicks off a nice 2.5% dividend. Just bear in mind, this stock is built for comfort, not speed.
While it’s done a great job moving into some of the most dynamic long-term sectors out there, its size and judiciousness will deliver solid long-term gains, rather than home-run returns.
But if you’re looking for a blue-chip, innovative tech stock for the long term, there are few better choices than INTC.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
