Scope of margin expansion
With $166 billion market capitalization, Intel (INTC) leads the semiconductor space. In 4Q14, Intel’s gross margin grew by 0.4% and 3.4% on a quarter-over-quarter and year-over-year, or YoY, basis.
The expansion in the margin was primarily driven by higher platform average selling prices, or ASPs, for the PC Client Group and Data Center Group microprocessors and chipsets.
As we already saw earlier in this series, both of the operating segments mentioned above contribute more than 90% of overall revenue. All of the operating segments except Mobile and Communications Group, or MCG, registered a YoY increase. MCG registered negative revenue due to contra revenue. Intel, like its peer Microsoft Corporation (MSFT), was slow to realize the importance of mobile computing.
If you feel positive about Intel’s growth prospects and want to gain exposure to it, you can consider investing in the VanEck Vectors Semiconductor ETF (SMH) or the Technology Select Sector SPDR Fund (XLK). Intel accounts for about 19%, and 3.55% of these ETFs, respectively.
Intel’s cash, debt, and cash flow position
For fiscal year 2014, Intel generated an operating cash flow of $20.4 billion. As of 4Q14, it holds cash and short-term investments worth $14.05 billion. It carries a total debt of $13.7 billion. As in 3Q14, debt continues to be substantial on the company’s books. However, its cash and cash flow position creates a buffer. The majority of its debt is long term.
Investments in research and development
Intel spent ~$11.5 billion on R&D, or research and development, in 2014. This represents ~21% of its total revenue—compared to 19% in 2013.
Advanced Micro Devices, Inc. (AMD) spends ~25% of its revenue on R&D. To expand into new growth markets—like cloud and the wearables space—Intel invested in Real Sense Technology, Cloudera, Recon Instruments, and Thalmic Labs. Also, it acquired Basis Science and Lantiq.