Semiconductors Intel Initiating With Outperform (1) August 15, 2006

Semiconductors

Intel

Initiating With Outperform (1)

August 15, 2006

One High-Quality Turnaround Story

Analysts

John Barton

(646) 562-1366 john.barton@cowen.com

Conclusion:

We are initiating coverage of INTC with an Outperform rating andbelieve that the shares can appreciate by 10-30% relative to the market over thenext 12 months. We expect the company's pending, massive product refresh tocurb market share losses and that ongoing organizational changes will improvefocus on the core PC businesses. We believe the new streamlined organizationwill be able to avoid a reoccurrence of recent multiple execution missteps. Inaddition, we expect INTC's manufacturing lead and ability to offer completeplatform solutions to result in competitive advantages. We expect the stockprice to appreciate as investors begin to see evidence of this turnaround.

■

New Products Should Reverse Market Share Losses.

New productsfor notebooks, desktops, and servers address deficiencies in powerconsumption, and 64-bit support should help the company stem recentmarket share losses.

■

Manufacturing is a Key Competitive Advantage.

At the 65nm node,Intel is at least nine months ahead of its comps. This advantage not onlyhelps address competitive parameters such as power and speed, but alsobetter equips INTC to drive competitive pricing w/ muted impact onmargins.

■

Streamlining Should Increase Competitiveness.

We believe Intel'srecent moves to optimize organizational structure and divest unrelatedbusinesses will significantly increase the company's competitiveness andexecution in the core PC-related businesses.

■

Stock Appears Attractively Valued.

The stock is trading at 16.1x ourCY07 EPS estimate, and we believe this multiple can expand to 18-21x asinvestors become more confident that the company can reverse recentmarket share trends.

INTC

(08/15)

$18.00

Revenue

$MM

Mkt cap

$105.6B

FY 20052006E2007E 2008E

Dil shares out

5868.0MM

Dec ActualPriorCurrentPrior Current PriorCurrent

Avg daily vol

64,696.3K

Q1 9,434.0—8,940.0A—9,012.0 ——52-wk range

$16.8-27.5

Q2 9,231.0—8,009.0A—8,922.0 ——Dividend

$0.40

Q3 9,960.0—8,506.0—9,770.0 ——Dividend yield

2.2%

Q4 10,201.0—9,339.0—10,942.0 ——BV/sh

$5.93

Year

38,826.0—34,794.0—38,646.0

——

Net cash/sh

$0.90

EV/S ——2.8x—2.5x ——Debt/cap

6.3%

ROA (LTM)

7.7%

5-yr fwd EPS

NA

EPS

(1)

$

FY 20052006E2007E 2008E

growth (Norm)

Dec ActualPriorCurrentPriorCurrent PriorCurrent

Q1 0.35—0.23A—0.23 ——Q2 0.33—0.15A—0.22 ——Q3 0.32—0.17—0.28 ——

S&P 500

1280.5

Q4 0.40—0.24—0.37 ——

Year

1.40—0.79—1.09

——

P/E ——22.8x—16.5x ——

(1)

Pro forma EPS excludes equity-based compensation

Please see addendum of this report for important disclosures.

www.cowen.com

IntelAugust 15, 2006

2

Investment Thesis

We believe that INTC represents an uncharacteristically high-quality “turnaround”play and advocate buying the stock now to participate in the expected shareappreciation driven by the pending turnaround. The company’s recent market sharelosses to AMD ($20.69, Neutral) and lack of performance leadership have persistedwell beyond all historical norms. As a result, the stock price has declined by 35%from its recent high of $27.50 in November 2005. We believe the stock is priced toreflect investors’ “show me” attitude regarding Intel’s ability to regain market share.We acknowledge that Intel faces a significant challenge. AMD is a much moresignificant competitor than in any previous period, and regaining market share willbe more difficult than at any time in the past. We believe AMD’s brand will havegreater staying power as a result of its recent support/endorsements throughout thePC ecosystem (e.g., Microsoft’s operating system support, Dell’s first-ever use ofAMD processors). However, we believe that Intel’s pending, massive product refreshis, at minimum, capable of stabilizing its market share. We also believe that thecompany’s manufacturing leadership and ability to leverage broader platformofferings makes Intel better equipped to compete than AMD. Finally, we anticipatebetter execution and renewed vigor resulting from the company’s willingness tostreamline product offerings and the organizational structure to focus on its corecompetency of PC processors and supporting chips.We believe that Intel is within two quarters of delivering the market share transitionand financial performance that will address investors’ “show me” view on the stock.As investors see proof of a turnaround, we expect the stock to return to more normalmarket valuations as defined by the company’s historical and the industry’s currentaverages. As a result, we believe that the stock represent a compelling investmentopportunity.

Investment Highlights

Massive Product Refresh Imminent

We expect Intel’s extensive new product introductions over the next six to ninemonths to be the most significant series of events within the PC arena over thisperiod. With major processor upgrades for virtually all platforms from notebooks toservers, we expect Intel to have closed and in many instances reversed theperformance gap with AMD. As a result of this reinvigorated product offering, weexpect Intel to, at a minimum, halt market share losses. Figure 1 outlines Intel’smarket share losses, which began in late 2003 as a result of AMD’s Opteron andAthalon-64 product introductions.

IntelAugust 15, 2006

3

Figure 1: Intel's Market Share (by units)

77%78%79%80%81%82%83%84%

1 Q 0 3 2 Q 0 3 3 Q 0 3 4 Q 0 3 1 Q 0 4 2 Q 0 4 3 Q 0 4 4 Q 0 4 1 Q 0 5 2 Q 0 5 3 Q 0 5 4 Q 0 5 1 Q 0 6

O p t e r o n I n t r o d u c e d A t h a l o n - 6 4 I n t r o d u c e d

Source: Cowen and Company

The primary competitive elements of a processor road map today include: (1) powerconsumption, (2) 64-bit capability, (3) multiple core architectures and (4)manufacturing process technology. Intel’s market share loss over the last 12 monthswas driven first and foremost by AMD’s superior power consumption and, to a lesserdegree, AMD’s broad support of 64-bit instructions. We acknowledge that AMD’swinning strategy of developing a backward compatible 64-bit architecture was bothinsightful and highly visible. However, we believe this differentiation was only anadvantage in the server/workstation segments since we do not believe that 64-bitsupport will be important to users in the mobile and desktop market until Microsoftreleases the Vista operating system in early 2007. With respect to the last twoattributes, multi-core technology is best viewed as a design approach to achievepower savings, and manufacturing process technology is best viewed as a way toachieve power savings, performance, and improved costs. We outline below themajor pending developments in Intel’s road map by platform. On July 27, 2006, Intelbegan shipping processors into every platform type. These processors are multi-core, support industry-standard 64-bit instructions, are manufactured on anindustry-leading 65 nanometer process, and offer significant power savings. Figure2 outlines these product introductions.

Mobile

Intel’s mobile offering was the first to get a significant product refresh as thecompany attempted to maintain its product leadership. In January 2006, thecompany introduced the processor previously code named Yonah. The mostsignificant aspect of this introduction was that it marked the company’s and theindustry’s first PC processor manufactured on a 65 nanometer process.Architecturally, the processor was not that significant since it borrowed the samemicro architecture that was used in the processors marketed under the “Pentium M”brand (code names Banias and Dothan). The Yonah processor is marketed under the

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