Intel sets aside $10 billion to buy up lagging shares

SAN FRANCISCO Mon Jan 24, 2011 5:22pm EST

Intel Chief Executive Paul Otellini casts a shadow on a video wall during the company's unveiling of its second generation Intel Core processor family at a news conference at the Consumer Electronics Show (CES) in Las Vegas January 5, 2011. REUTERS/Rick Wilking

Intel Chief Executive Paul Otellini casts a shadow on a video wall during the company's unveiling of its second generation Intel Core processor family at a news conference at the Consumer Electronics Show (CES) in Las Vegas January 5, 2011.

Credit: Reuters/Rick Wilking

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SAN FRANCISCO (Reuters) - Intel Corp boosted its share buyback plan by $10 billion, seeking to revitalize its flagging stock amid criticism it is getting left behind by rivals like Nvidia in a red-hot, fast-moving mobile market.

Intel earned record profits last year but its shares have severely underperformed rivals. On Monday, its stock climbed 2 percent after the buyback was announced.

But Nvidia, which early this month announced a spate of tablet wins for its mobile Tegra chip, surged 11 percent after Barron's said the stock could gain as much as 80 percent.

"(Intel) management can't be very pleased with what happened after earnings. They said all things they needed to say and the stock did nothing," said Wedbush analyst Patrick Wang. "That's got to be frustrating, so this is them coming and making a statement that they're confident in their business."

The world's largest chip maker has splashed out in the past year on two major acquisitions, including security software firm McAfee, and plans to double its capital expenditure. Now it is again reaching into its $22 billion cash hoard to try to assuage investors peeved at a seemingly moribund stock price.

Intel commands 80 percent of the PC market, a situation expected to persist for years. But if the PC gradually loses relevance and, as expected, users increasingly migrate to mobile devices such as tablets, its growth will be curtailed over the long term.

Many stock investors have turned their attention to much smaller Nvidia, whose new Tegra mobile chips have helped fuel a rally in its shares in recent weeks, including on Monday.

"People are just starting to understand the drivers for the company," said Roth Capital analyst Arnab Chanda.

Intel is increasing its quarterly dividend by 15 percent to 18.12 cents per share and the extension of its share buyback funds increased the amount available for repurchases to $14.2 billion, a sizable amount compared to Intel's market capitalization of $116 billion.

"Clearly they had their best year in 2010 but still the stock has underperformed its peers," said CLSA analyst Srini Pajjuri, who rates Intel's shares "underperform."

Pajjuri said that with gross margins hitting a record 67.5 percent in the last quarter of 2010, some investors are concerned that they are more likely to decline than to improve further. Indeed, the company has forecast gross margins of around 64 percent for the current quarter.

FAR BEHIND

Wang expects Intel to take a couple of years to go through the buyback funds, spending faster if the semiconductor sector runs into a correction.

Intel's PC processors are so prevalent that the company is a household name, but it has yet to make its mark in the mobile gadgets that people increasingly use to surf the Web and update their social networking profiles.

On January 13 Intel posted better-than expected revenue and margins for the fourth quarter, but concerns about Intel's lack of success making mobile chips have hurt its stock.

Chips designed with ARM Holdings Plc architecture dominate the tablet and smartphone market, while Intel's mobile chips, which are adapted from its PC chip architecture, so far have been seen by manufacturers as too power-hungry for devices that are left on for several hours at a time.

Nvidia's mobile chips combine the company's traditional strength in making graphics processors for PCs with a license to use ARM's energy-efficient architecture.

Intel plans to launch improved mobile chips this year to help it stake out market share in tablets, but analysts say it will be extremely difficult to catch up with Nvidia and competitors like Qualcomm Inc.

The Philadelphia Semiconductor Index has surged around 42 percent since the start of September and Nvidia's stock has jumped 165 percent -- but Intel's shares have gained only 20 percent in that time.

Intel's shares ended up 2 percent at $21.24.

"Today's announcement signals confidence in our fundamental business strategies both today and looking forward," Paul Otellini, Intel president and chief executive, said in a statement.

(Additional reporting by Jennifer Saba in New York, editing by Gerald E. McCormick, Phil Berlowitz)

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