Intel Corporation (NYSE: INTC) is the world's largest semiconductor company by sales and market capitalization. It designs, manufactures and sells digital technology platforms that consist of microprocessors and chipsets. Related hardware, software and services complement its core offerings to round out the portfolio. Intel's suite of products can be applied to electronics across the form factor continuum. Its Client Computing Group operating segment makes products intended for consumer and enterprise electronics such as notebooks, tablets and mobile phones, and this segment contributed 58% of 2015 revenue. The Data Center Group creates products for servers, storage and network hardware, and it contributed a further 29% of 2015 sales.

Intel operates in a highly competitive environment that has grown more dynamic as semiconductor content rose across many aspects of daily life and new computing form factors became more popular. Intel's sheer scale and market dominance create a moat, and effective leveraging of these resources keeps that advantage sustainable in the medium term. However, technology can change rapidly, and the relatively quick ascension or decline of other semiconductor firms highlights the difference between these and other products such as basic consumer goods.

Buffett's Moat

Warren Buffett helped develop and popularize the concept of economic moats, which are factors that provide competitive advantage and allow companies to maintain market share. Moats can be created by economies of scale, the network effect, intellectual property, regulation and strong brands. Identifying wide and sustainable moats is an important part of Warren Buffett's investment process, because companies without competitive advantage are doomed to experience marginal returns approaching the opportunity cost of capital, causing profits to dwindle without generating any true gains for shareholders. The five moat-creating factors above can insulate companies from the effects of competition, allowing them to generate strong profits.

Intel's Qualitative Moat Analysis

Intel held nearly 15% of the global semiconductor market share as of March 2016, followed by Samsung Electronics Co. Ltd. (KRX: 005930) at 11.6%, SK Hynix Inc. (KRX: 000660) at 4.8% and Qualcomm Inc. (NASDAQ: QCOM) at 4.5%. Intel benefits from economies of scale, with its massive global manufacturing presence representing a major barrier to entry for potential newcomers. Intel has consistently led the world in semiconductor market share, though the company has been forced to realign its focus in recent years as the personal computer market became less important. Intel's personal computer market share at times eclipsed 95% when Advanced Micro Devices Inc. (NYSE: AMD), the only viable competitor in the space, had a poor product cycle. However, the rise of mobile phones, tablets, the internet of things and the expansion of data centers have opened the door to categories in which Intel's dominance was less complete. With product life cycles that last under a decade, rapid technological shifts can fundamentally alter competitive advantage attributed to scale. Intel's massive size has facilitated heavy research and development spending and strategic acquisitions to offset competitive pressures.

Intel benefits from brand identity and intellectual property, but these are not major contributors to sustainable moat relative to the top competitors, which also benefit from these same forces. Switching costs play a role, as existing relationships with original equipment manufacturers often pave the way for next generation design contracts. Regulation does very little to contribute to the moat.

Quantitative Moat Analysis

Assuming a blended effective interest rate of 3.64%, a market risk premium of 6.16% and debt-to-capital ratio of 0.293, Intel's weighted average cost of capital (WACC) is 6.99% as of June 2016. This is well short of Intel's 15.2% trailing 12-month return on invested capital (ROIC). This value falls in the middle of the distribution of values over the preceding decade, which ranged from 9.98 to 24.63%. ROIC above WACC is a qualitative indicator of economic moat, because competition tends to push returns to the opportunity cost of capital. Intel's operating margin fluctuated between 16 and 36% between 2006 and 2015, with the March 2016 value falling at 24.8%. This indicates some margin pressure but no sustained downward trend due to competition, indicating a sustainable moat which will be subject to challenges in the medium term.

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