MORGAN STANLEY DEAN WITTER

Equity Research North America United States of America

In-Depth

Page 1

Intel Corp.
Reuters: INTC.O Bloomberg: INTC NASDAQ: INTC
Change in Price Target

Technology: Semiconductors

Mark L. Edelstone (edelston@ms.com) (415) 576-2381 John Cross Louis P. Gerhardy Sonia Kimotsuki

July 26, 2000

Slightly Better-than-Expected Results and Bullish Outlook

Operating revenues were solid
Second-quarter revenues and gross margins from continuing operations exceeded expectations for seasonal weakness.

STRONG BUY

Price (July 21, 2000): Price Target: 52-Week Range:

$138.19 $200.00 $146.69-62.88

Third-quarter visibility is unusually high

WHATS CHANGED

Target Price: Earnings (2000): Earnings (2001):

$175 to $200 $3.37 to $3.50 $3.60 to $3.90

Managements 3Q guidance is abnormally bullish, and it meets our expectations for strong second-half 2000 fundamentals.

Potential exists for solid positive surprises in 3Q and 4Q

Positive surprise potential should be high as seasonal PC demand improves and 0.18-micron production increases.

Raising estimates and target

We are increasing our earnings estimates and stock-price target to $200 to reflect strong fundamental outlook.

Price Performance

FY ending Dec 31:

1999A

2000E

2001E

2002E

EPS ($) Prior EPS Ests. ($) P/E Price/Book Market Cap ($ m) Return on Equity (06/00)(%) L-T EPS Grth. ('00 - '05) (%) P/E to Growth Shares Outstanding (m)

2.31 59.7 14.8 484,002 27.7 20.0 1.78 3,502.5

Qtrly EPS

3.50 3.37 39.5 10.8

1999A actual

3.90 3.60 35.5 8.3

2000E curr prior

2001E curr prior

Source: ILX

Q1 Q2 Q3 Q4 E = Morgan Stanley Dean Witter Research Estimate.

0.57 0.51 0.55 0.69

0.71A 1.00A 0.83E 0.95E

0.99E 0.78E 0.89E

0.92 0.92 0.99 1.06

0.84 0.84 0.93 0.99

Company Description Intel designs, manufactures, and markets highperformance microprocessor units (MPUs) and related chips for the PC market.

Please refer to important disclosures at the end of this report.

MORGAN STANLEY DEAN WITTER

Page 2

Slightly Better-than-Expected Results and Bullish Outlook

Summary and Investment Conclusion

After the market closed on July 18, Intel reported a nominal positive earnings surprise, as actual pre-split results of $1.00 exceeded our estimate of $0.99 and the consensus estimate of $0.98. Although Intel reported post-split results, we will not reflect the two-for-one stock split until it is payable on July 30. As expected, Intels second-quarter results included one-time gains of $0.31 per share from abnormally high investment gains on the sale of securities. The results also included a $0.04 charge for the recall of motherboards and components associated with Intels flawed MTH (memory translator hub) used to support 820 chipsets with SDRAM. Without these abnormal issues, Intel would have reported earnings of $0.73 versus our estimate of $0.72 and the consensus estimate of $0.71. Based on the actual second-quarter results, strong demand patterns, solid manufacturing execution, and a higher level of investment income in future quarters, we have increased our 2000 and 2001 earnings estimates. Our 2000 earnings estimate has increased to $3.50 per share from $3.37, while our 2001 earnings-per-share estimate has increased to $3.90 from $3.60. Expectations for a higher level of investment income led to a $0.04 increase in our estimates in each of the next six quarters. Therefore, approximately half of the increase in our 2001 earnings estimate is derived from higher revenue and gross margin assumptions. In comparison to our new earnings estimates, consensus estimates for 2000 and 2001 were $3.36 and $3.60, respectively, before Intel reported its actual second-quarter results. Given our expectations for a solid increase in near-term earnings power and the potential for more meaningful positive earnings surprises during the next two quarters, we reiterate our Strong Buy rating and have increased our 12month stock-price target on INTC to $200 from $175.
Revenue Growth Should Continue to Accelerate...

selling prices (ASPs) were essentially flat sequentially for the third consecutive quarter, while we estimate that unit shipments increased 3% and 30% over the prior and yearago quarters, respectively. Similar to the trends of the last several quarters, Intels MPU mix remained unchanged as a percentage of the performance and value segments. As expected, Intels chipset unit shipments declined, and its flash memory business remained extremely strong, with record revenues and higher average selling prices. We expect flash memory demand to remain strong for the foreseeable future, and management expects demand to outstrip supply through at least the remainder of this year. Given the broad-based acceptance of Intels 815 family of chipsets and the lack of Pentium 4-based chipset competition in the future, we expect Intel to regain market share in the chipset market during the next couple of years. This phenomenon should also help Intel to enjoy a resumption of motherboard growth in the second half of this year. While it remains a relatively small percentage of overall revenues, Intels communications businesses continued to make progress and enjoyed robust growth in the third quarter.
...And Near-Term Visibility Appears Abnormally High

We believe that Internet-based demand and a strong global economy have helped the overall PC market demand trends to remain solid. More important, a seasonal uptick in demand should lead to a significant increase in sequential unit and revenue growth and a further acceleration in year-overyear revenue growth during the second half of the year. When the second half of the year is compared to the first half, MPU shipments typically increase by 2025% in a normal year, and we believe that Intel is well positioned to capitalize on this trend once again this year. Management suggested that third-quarter revenues would be up from the second-quarter level, which represents the most bullish specific guidance Intel has ever provided for a third quarter. In fact, this only represents the second time that Intel has offered such aggressive guidance for any quarter since it began providing specific guidance in the mid-1990s. The only other time Intel provided guidance for up revenues was in the fourth quarter of 1999, when actual revenues grew 12% sequentially.

Intel reported record second-quarter revenues of $8.3 billion; they grew 4% sequentially and 23% over the year-ago quarter. In addition, they exceeded managements guidance of flat revenues and our expectations for slightly less than 2% sequential growth. Intel shipped a record number of microprocessors (MPUs) in the quarter, and we estimate that they slightly exceeded 32 million units. MPU average
Intel Corp. July 26, 2000
Please refer to important disclosures at the end of this report.

MORGAN STANLEY DEAN WITTER

Page 3

Despite a Large Uptick in Output, Supply-Chain Inventories Should Remain Below Normal Through 2000

Based on current order patterns, Intel suggested that its third-quarter outlook was for significantly better-thannormal linearity. Intel has been supply-constrained during the last several quarters, and third quarters normally tend to be back-end loaded. However, we believe that an uptick in supply promoted by the continued transition to Intels 0.18micron production has created better-than-normal visibility for the current quarter. Intels 0.18-micron output nearly doubled in the second quarter, and more than half of the companys unit shipments were derived from this more advanced manufacturing capacity. We still expect the 0.18-micron transition largely to be completed in the third quarter, and given the smaller die sizes of its 0.18-micron designs, Intels output should increase significantly during the next several months. Regardless, we believe that the seasonal uptick in demand will cause supply/demand conditions to remain relatively tight during the remainder of this year. While the top-tier OEMs should be able to comfortably meet their consumption needs, we believe that the second- and third-tier OEMs will remain in a constrained environment. Intel managed to increase its unit shipments into the distribution channel during the latter part of the second quarter, but management would still like to increase distribution inventories by another couple of weeks. Furthermore, Intels own inventories remain near record lows, and we do not expect the company to restore them to normal/target levels until the first quarter of next year.
Gross Margins Will Likely Continue to Surprise on the Upside During the Next Two to Three Quarters

quarter gross margin of 62.9% exceeded managements guidance, as well as our own expectations. We believe that excellent manufacturing execution enabled Intels secondquarter gross margin to only decline 10 basis points sequentially and exceed our estimate by 40 basis points. As 0.18-micron production increases, Intels gross margin should expand, and we believe that positive surprises are likely to occur during the next two to three quarters. We expect Intels gross margins to reach record levels in the fourth quarter, and they should reach an intermediate term peak by the first quarter of next year. While we believe that next years gross margin can stabilize, we also believe that downside risk exists as Intel completes its 0.18-micron transition, ramps up new products, and faces the potential for increased unit competition from AMD.
New Product Introductions Will Be Prevalent During the Next Several Quarters

Without the 250 basis point charge to cover Intels MTHbased motherboard replacement program, Intels second-

During the next several quarters, Intel will make a significant number of new MPU product introductions, including Pentium 4 and Itanium in the latter part of the third quarter or the early part of the fourth quarter, and Timna in the first quarter of 2001. While Intels Itanium has slipped again, we believe that the delay is modest, and we continue to believe that Itanium revenues will not be meaningful until 2002. On the other hand, we expect Intel to use its Pentium 4 MPU to aggressively increase the frequencies of its processor offerings next year in order to compete with AMDs copper-based Athlon processors. We believe that our Pentium 4 ramp is conservative for next year, which suggests that our overall estimates could prove to be too low. In the near term, we expect Intel to aggressively market its Pentium 4 family later this year, and management claims that it remains committed to supporting Pentium 4 with Rambus DRAMs.

Intel Corp. July 26, 2000

Please refer to important disclosures at the end of this report.

MORGAN STANLEY DEAN WITTER

Page 4

Exhibit 1

Intel Corporation Earnings Model

(Dollar amounts in millions, except per-share data; fiscal year ends 12/31) 1Q99 Revenues Sequential Change Change vs Year Ago Cost of Goods Percent of Revenues Gross Margin Percent of Revenues R&D Percent of Revenues SG&A Percent of Revenues Operating Income Percent of Revenues Incremental Oper Margin Other Income (Exp) Percent of Revenues Profit Before Taxes Percent of Revenues Taxes Tax Rate Net Income, Ops Extraordinary Credit Total Net Income Percent of Revenues EPS Ops Extroadinary Total EPS Change vs Year Ago Common & Equiv Sh (Mil) 1999.0 28.1% $0.57 $0.00 $0.57 60.3% 3,478.0 1749.0 25.9% $0.51 $0.00 $0.51 53.2% 3,446.0 1893.4 25.8% $0.55 $0.00 $0.55 22.6% 3,472.0 2386.5 29.1% $0.69 $0.00 $0.69 15.5% 3,484.0 8028.0 27.3% $2.31 $0.00 $2.31 34.1% 3,470.0 2473.8 30.8% $0.71 $0.00 $0.71 23.1% 3,497.0 $7,103 -6.7% 18.4% 2,912.0 41.0% 4,191.0 59.0% 663.0 9.3% 891.0 12.5% 2,637.0 37.1% -39% 347.0 4.9% 2,984.0 42.0% 985.0 33.0% 1,999.0 2Q99 $6,746 -5.0% 13.8% 2,771.0 41.1% 3,975.0 58.9% 731.0 10.8% 924.0 13.7% 2,320.0 34.4% -89% 290.0 4.3% 2,610.0 38.7% 861.0 33.0% 1,749.0 3Q99 $7,328 8.6% 8.9% 3,026.0 41.3% 4,302.0 58.7% 840.0 11.5% 952.0 13.0% 2,510.0 34.3% 33% 316.0 4.3% 2,826.0 38.6% 932.6 33.0% 1,893.4 4Q99 $8,212 12.1% 7.9% 3,176.0 38.7% 5,036.0 61.3% 877.0 10.7% 1,105.0 13.5% 3,054.0 37.2% 62% 508.0 6.2% 3,562.0 43.4% 1,175.5 33.0% 2,386.5 11.9% $11,885.0 40.4% 17,504.0 59.6% $3,111.0 10.6% $3,872.0 13.2% $10,521.0 35.8% 63% $1,461.0 5.0% 11,982.0 40.8% 3,954.0 33.0% 8,028.0 1999 $29,389 1Q00 $8,021 -2.3% 12.9% 2,964.0 37.0% 5,057.0 63.0% 951.0 11.9% 1,124.0 14.0% 2,982.0 37.2% -38% 640.0 8.0% 3,622.0 45.2% 1,148.2 31.7% 2,473.8 2Q00 $8,300 3.5% 23.0% 3,083.0 37.1% 5,217.0 62.9% 971.0 11.7% 1,223.0 14.7% 3,023.0 36.4% 15% 2,341.0 28.2% 5,364.0 64.6% 1,711.1 31.9% 3,652.9 ($200.0) 3452.9 44.0% $1.04 ($0.04) $1.00 97.8% 3,502.5 2923.1 31.9% $0.83 $0.00 $0.83 52.8% 3,507.5 3339.4 32.4% $0.95 $0.00 $0.95 38.8% 3,512.5 3Q00E $9,150 10.2% 24.9% 3,294.0 36.0% 5,856.0 64.0% 1,020.0 11.1% 1,350.0 14.8% 3,486.0 38.1% 54% 800.0 8.7% 4,286.0 46.8% 1,362.9 31.8% 2,923.1 4Q00E $10,300 12.6% 25.4% 3,553.5 34.5% 6,746.5 65.5% 1,060.0 10.3% 1,590.0 15.4% 4,096.5 39.8% 53% 800.0 7.8% 4,896.5 47.5% 1,557.1 31.8% 3,339.4 21.7% $12,894.5 36.0% 22,876.5 64.0% $4,002.0 11.2% $5,287.0 14.8% $13,587.5 38.0% 48% $4,581.0 12.8% 18,168.5 50.8% 5,779.3 31.8% 12,389.2 ($200.0) 12189.2 34.6% $3.53 ($0.04) $3.50 51.1% 3,504.9 3245.0 32.6% $0.92 $0.00 $0.92 30.5% 3,515.0 3240.1 32.1% $0.92 $0.00 $0.92 -8.3% 3,520.0 3505.5 32.0% $0.99 $0.00 $0.99 19.3% 3,525.0 3733.3 31.1% $1.06 $0.00 $1.06 11.2% 3,530.0 13723.8 31.9% $3.90 $0.00 $3.90 11.4% 3,522.5 2000E $35,771 1Q01E $9,950 -3.4% 24.0% 3,432.8 34.5% 6,517.3 65.5% 1,080.0 10.9% 1,500.0 15.1% 3,937.3 39.6% -46% 800.0 8.0% 4,737.3 47.6% 1,492.2 31.5% 3,245.0 2Q01E $10,100 1.5% 21.7% 3,535.0 35.0% 6,565.0 65.0% 1,110.0 11.0% 1,525.0 15.1% 3,930.0 38.9% -5% 800.0 7.9% 4,730.0 46.8% 1,490.0 31.5% 3,240.1 3Q01E $10,950 8.4% 19.7% 3,832.5 35.0% 7,117.5 65.0% 1,200.0 11.0% 1,600.0 14.6% 4,317.5 39.4% 46% 800.0 7.3% 5,117.5 46.7% 1,612.0 31.5% 3,505.5 4Q01E $12,000 9.6% 16.5% 4,200.0 35.0% 7,800.0 65.0% 1,250.0 10.4% 1,900.0 15.8% 4,650.0 38.8% 32% 800.0 6.7% 5,450.0 45.4% 1,716.8 31.5% 3,733.3 20.2% $15,000.3 34.9% 27,999.8 65.1% $4,640.0 10.8% $6,525.0 15.2% $16,834.8 39.2% 45% $3,200.0 7.4% 20,034.8 46.6% 6,310.9 31.5% 13,723.8 2001E $43,000

Source: Company Reports and Morgan Stanley Dean Witter Research Estimates

Intel Corp. July 26, 2000

Please refer to important disclosures at the end of this report.

MORGAN STANLEY DEAN WITTER

Page 5

Exhibit 2

Intel Corporation Balance Sheet

(Dollars in millions; fiscal year ends in December) 3Q98 Assets Cash & Securities Accounts Receivable Inventories Other Current Assets Total Current Assets Net PP&E Other Assets Total Assets 4Q98 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00

$8,687.0 3,636.0 1,578.0 812.0 $14,713.0 11,863.0 2,812.0 $29,388.0

$7,626.0 3,527.0 1,582.0 740.0 $13,475.0 11,609.0 6,387.0 $31,471.0

$10,589.0 3,319.0 1,708.0 833.0 $16,449.0 11,492.0 5,152.0 $33,093.0

$10,609.0 3,265.0 1,763.0 836.0 $16,473.0 11,412.0 4,916.0 $32,801.0

$11,891.0 3,494.0 1,626.0 905.0 $17,916.0 11,594.0 9,428.0 $38,938.0

$11,788.0 3,700.0 1,478.0 853.0 $17,819.0 11,715.0 14,315.0 $43,849.0

$11,216.0 3,706.0 1,562.0 977.0 $17,461.0 11,879.0 18,524.0 $47,864.0

$13,644.0 4,333.0 1,607.0 966.0 $20,550.0 12,324.0 15,646.0 $48,520.0

Liabilities & Shareholders Equity Short-Term Debt $192.0 Other Current Liabilities 5,064.0 Long-Term Debt 583.0 Other Liabilities 1,750.0 Shareholders Equity 21,799.0 Total Liabilities & Equity $29,388.0 Book Value Per Share Cash Per Share Long-Term Debt/Equity Total Debt/Equity Net Working Capital Current Ratio Quick Ratio Return on Equity Return on Avg Equity * Return on Assets Return on Sales Sales/Total Assets A/R Days Sales Out Inventory Turns Days of Inventory Revenues Per Employee (000) * Average over last four quarters
Source: Company Reports

$159.0 5,645.0 702.0 1,588.0 23,377.0 $31,471.0 $6.72 $2.19 3.0% 3.7% $7,671.0 2.3 2.0 35.3% 28.4% 26.2% 27.1% 0.97 42 8.1 45 $472.2

$182.0 6,034.0 699.0 1,452.0 24,726.0 $33,093.0 $7.11 $3.04 2.8% 3.6% $10,233.0 2.6 2.4 32.3% 29.3% 24.2% 28.1% 0.86 43 6.8 53 $438.5

$135.0 4,982.0 666.0 1,546.0 25,472.0 $32,801.0 $7.39 $3.08 2.6% 3.1% $11,356.0 3.2 2.9 27.5% 31.2% 21.3% 25.9% 0.82 44 6.3 58 $413.2

$164.0 6,225.0 884.0 2,483.0 29,182.0 $38,938.0 $8.40 $3.42 3.0% 3.6% $11,527.0 2.8 2.5 20.0% 28.5% 15.0% 19.9% 0.75 44 7.5 49 $428.5

$230.0 6,869.0 955.0 3,260.0 32,535.0 $43,849.0 $9.34 $3.38 2.9% 3.6% $10,720.0 2.5 2.3 25.9% 26.2% 19.2% 25.7% 0.75 41 8.6 42 $467.9

$373.0 6,734.0 868.0 3,750.0 36,139.0 $47,864.0 $10.33 $3.21 2.4% 3.4% $10,354.0 2.5 2.2 27.4% 25.6% 20.7% 30.8% 0.67 42 7.6 48 $457.0

$385.0 7,951.0 870.0 2,694.0 36,620.0 $48,520.0 $10.46 $3.90 2.4% 3.4% $12,214.0 2.5 2.3 27.9% 27.7% 21.0% 30.7% 0.68 48 7.7 47 $472.9

$6.22 $2.48 2.7% 3.6% $9,457.0 2.8 2.5 28.6% 27.5% 21.2% 23.2% 0.92 49 8.1 45 $411.7

Intel Corp. July 26, 2000

Please refer to important disclosures at the end of this report.

MORGAN STANLEY DEAN WITTER

The Americas
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