Intel Would TSMC Take INTC...?

EQUITY RESEARCH Intel Corporation (INTC)

Intel Target | Estimate Change Would TSMC Take INTC...? USA | Semiconductors October 23, 2020 RATING HOLD Key Takeaway PRICE $53.90^ In our Jan '20 note "...Focus, Frugality, ...and Fabless?" we argued INTC needs to go MARKET CAP $227.0B fabless - it appears that INTC is inching to that same conclusion. We think the real PRICE TARGET (PT) $50.00 (FROM $54.00) question is whether TSMC would make INTC CPU's on its most advanced transistors. UPSIDE SCENARIO PT $95.00 We think it would, but only if INTC gave up leading edge transistors itself. TSMC is DOWNSIDE SCENARIO PT $40.00 gaining share from INTC in datacenters through AMD and NVDA, why would it help INTC ^Prior trading day's closing price unless turnaround only to kill that golden goose? otherwise noted. FY Dec Meet and Miss. 3Q20 revs/EPS of $18.3bn/$1.11 were in-line with consensus on slightly USD 2018A 2019A 2020E 2021E higher revs (50bps higher than Street) and lower OpEx offset lower gross margins EPS 4.58 4.87 .4.89 .4.72 (190bps lower than Street). INTC's 4Q20 rev/EPS outlook of $17.4bn/$1.10 is in-line with Prev. 4.85 5.37 consensus on revs and $0.02 above Street on EPS, driven by lower margin offset by FY P/E 11.8x 11.1x 11.0x 11.4x higher other income. *EPS changes reflect lower estimates and change from GAAP to non-GAAP estimates Starting to See the Fabless Light? In our Jan 21 upgrade "...Focus, Frugality, ...and Fabless?", we argued that INTC's transistor lead had been lost for good, and that by going fabless, INTC would turn into a cash flow and capital return machine that would add $19 Jan 20, 2020 Table Set for Change: Focus, to the stock. INTC's disappointing gross margin performance this year, pushouts of its Frugality, ...and Fabless? 10nm and 7nm production, and share loss to AMD in x86 and to NVDA in the data center appear to be leading INTC mgmt to that same conclusion. INTC CEO commentary has Jul 23, 2020 Our Fabless Thesis Now a gone from "we continue to look at ...non-CPU products in foundries" in January, to "our 2023 Higher Probability Event products will deliver on either Intel 7nm or external foundry processes" during its Oct '20 Aug 03, 2020 A Butterfly Flaps Its Wings in earnings call. 2005...

Would TSMC Take INTC? In 2018, after billions of dollars of investment and years of hard Oct 20, 2020 Finally Ditching Loss-Making work, TSMC wrested transistor leadership from INTC, and today, appears to have a full Memory...or Not? two-year lead on its 7nm (TSMC's 5nm) transistor - clearly, TSMC has a stronger hand than INTC at the negotiating table. While INTC is talking about outsourcing as if any Oct 19, 2020 Focus (sort of) is WIP, foundry/in-house permutation is available to them, we think there is a legitimate question Frugality and Fabless Hopefully Next as to whether TSMC would even want to become a foundry for INTC CPUs on its most advanced, leading edge transistors. Cloud Instance Analysis - Aug'20: Graviton We Think TSMC Would Become a Leading Edge CPU Foundry to INTC Only If INTC (ARM) and Inferentia Ramp Gave Up Internal Leading Edge Transistor Manufacturing. Consider TSMC's position: its DC CapEx Accelerating in '21: To Digest, or largest market, handsets, have gone ex growth. Consequently, one of the best prospects Not Digest? for growth at TSMC is in the ~$60bn PC and Server CPU market, which it is currently prosecuting through fabless customers like AMD, NVDA and XLNX, not to mention Google TPU, and Amazon Inferentia and Graviton. If TSMC agreed to make INTC CPUs on its leading edge transistors as INTC worked to catch up to TSMC on transistors, TSMC may, in effect, have helped INTC to turnaround, and take share from TSMC's highest Mark Lipacis * growth customers AMD and NVDA. For strategic purposes, we think TSMC would make Equity Analyst INTC CPUs on its leading edge transistors only if INTC agreed to give up making leading (415) 229-1438 [email protected] edge transistors itself. Vedvati Shrotre * Equity Associate (415) 229-1574 [email protected]

Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 11 to 18 of this report. * Jefferies LLC / Jefferies Research Services, LLC EQUITY RESEARCH Intel Corporation (INTC)

INTEL (INTC) The Long View | Scenarios Estimates Base Case USD 2018A 2019A 2020E 2021E • Management divests memory Rev. (MM) 70,848.0 71,965.0 75,332.0 69,781.0 • No actions are taken to streamline SG&A costs Previous 75,042.0 73,023.0 • Share loss to AMD in desktop and server and NVDA in Consensus EPS 4.58 4.87 4.86 4.68 datacenter with increased pricing pressure Previous 4.81 4.84 • Decline in PC unit shipments. • 2021E EPS: $4.72; P/E FWD: 10.6x; Price Target: $50 EPS Upside Scenario Q1 0.87 0.89 1.45A 0.95 • The COVID-19 virus is contained earlier Previous 1.02 • Management moves to a fabless model and Q2 1.04 1.06 1.23A 1.10 streamlines SG&A costs. Previous 1.20 • Better data center and corporate PC demand from COVID-19 driven work-from-home trends Q3 1.40 1.42 1.11A 1.27 • Design wins in datacenter for parallel processing and Previous 1.10 1.46 accelerator products (Nervana, Altera, GPU). • Share gains with new GPU products Q4 1.28 1.52 1.10 1.42 • AMD mis-executes. Previous 1.06 1.71 • 2021E EPS: $6.20; P/E FWD: 14x; Price Target: $95 FY Dec 4.58 4.87 4.89 4.72 Downside Scenario Previous 4.85 5.37 • COVID-19 outbreak extends beyond 2020 causing greater than expected demand destruction and supply Valuation chain constraints 2018A 2019A 2020E 2021E • Reaccelerating decline in PC unit TAM. P/Rev 3.2x 3.2x 3.0x 3.3x • Continued share loss to AMD, NVDA, XLNX and homegrown solutions from hyperscale players. EV/Rev 3.4x 3.4x 3.2x 3.5x Mis-execution of manufacturing process technology FY P/E 11.8x 11.1x 11.0x 11.4x • transitions. *EPS changes reflect lower estimates and change from GAAP to non-GAAP estimates • Gross margin compression due to under-utilization. • Valuation compression associated with lower growth Market Data outlook. • 2021E EPS: $3.66; P/E FWD: 11x; Price Target: $40 52-Week Range: $69.29 - $43.63 Total Entprs. Value $241.6B | Investment Thesis / Where We Differ Avg. Daily Value MM (USD) 1,453.06 • Near term, we think INTC's Data Center and Notebook PC business is benefiting from Work-from-Home Float (%) 101.0% trends driven by COVID-19 shelter-in-place restrictions • Longer term, we argue there is a tectonic shift in computing toward a parallel model, and as the incumbent with dominant share, we think INTC has the most to lose. • Our "4th Tectonic Shift in Computing" thesis argues that parallel processors will take share from x86 MPUs in the data center going forward. We also expect AMD will take x86 server MPU share from INTC in the data center. | Catalysts • Breakthroughs in manufacturing process technology or chip design. • Corporate PC refresh cycles. • Design wins for its parallel co-processor (Xeon Phi) or artificial intelligence products (Nervana, Movidius). • Adoption and ramp of 3D XPoint memory. • Design wins in Networking products for virtualized network appliances.

October 23, 2020 2 Please see important disclosure information on pages 11 - 18 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Chart 1 - INTC's CEO Bob Swan's Commentary We compare Intel CEO comments between Source Comments Intel's Jan '20 and Oct '20 earnings calls 20-Jan-20 "- we've historically leveraged third-party foundries for a long time, and it's always been in the probably 20% to 25% of our overall supply we get from third-party foundries. And we continue In the Jan '20 earnings call, Intel CEO to look at, particularly in the non-IA, non-CPU products foundries, we continue to evaluate suggested that Intel's use of wafer foundries where is – in a capital-intense business, where's the best place to have these things was targeted at non-CPU products manufactured 22-Oct-20 " - engaging the ecosystem in a different way, treating equipment and EDA providers and third- However, the statements made during party foundries not as suppliers, but as strategic partners that we can learn from and that can yesterday's earnings call suggested a help us solve customer problems. Now, we have more flexibility in whether we make or buy or whether we make for others." manufacturing strategy that was in limbo. On one hand the CEO said Intel's intention - I want to reiterate our intention to continue investing in leading process technology was to "continue investing in leading development to bring future process nodes and advance packaging capabilities to process technology development to bring market. This is a powerful force in creating future differentiation for our products and provides tremendous option value for our business. future process nodes...to market," which was followed by "I'm increasingly confident in - We have another great lineup of products in 2022, and I'm increasingly confident in the the leadership our 2023 products will deliver leadership our 2023 products will deliver on either Intel 7-nanometer or external foundry on either Intel 7-nm or external foundry processes, or a combination of both. processes,..."

- So as we think about 2023 and beyond, we're looking at the products required at that time, We disagree with Intel's contention that and we're evaluating our process versus other third-party processes moving to foundry on leading edge "- …we're evaluating each one of those kind of as we exit 2020 and really early 2021, because transistors is not an all or nothing proposition that's the time that we'll have to make the determination as to whether we're buying - we think it is. We agree with TSMC more 7-nanometer equipment or whether a third-party foundry would be adding that analyst Sherman Shang, from Jefferies capacity. So we're going through this process really looking at our capabilities, other's capabilities partner Fubon, who believes that TSMC would only manufacture INTC CPUs on its - we're still going to evaluate third-party foundry versus our foundry across those three criteria leading edge transistors if INTC agreed to and the call will be towards the end of this year, early next year give up on any future leading edge internal

- is it an all-or-nothing? No. I'd say we look at server client. We look at big core/small manufacturing. The rationale is both logical core. We look at some segments of the stack within the product line, so we're looking at and strategic...TSMC is currently gaining a variety of different parameters in terms of the makeup of the business. And as I said in share in data centers and PCs by providing my prepared remarks, it's probably not an all-or-nothing. It's probably a mix in terms of leading edge transistors to AMD, NVDA and the best path to ensure that we have a predictable cadence of leadership products for 2023 XLNX, a market we estimate will be $68bn and 2024 in 5 years. If TSMC were to agree to make - we'll learn a lot more as we have in the last 90 days during the course of the next 90 days, INTC CPUs on its leading edge transistors, . and I think be in a pretty good position to lay out our decision in the January timeframe. and help INTC gain share while it caught up Source: Jefferies, FactSet and Company data to TSMC on transistors, then it may also help INTC take share back from TSMC customers like AMD and NVDA.

Given that TSMC wrested the transistor crown from INTC in 3Q18, and has extended its transistor lead to 2 years on INTC's 7nm process, TSMC has a much stronger hand. We think the question is whether TSMC will manufacturer CPUs for INTC, not whether INTC will outsource its CPU production to TSMC

October 23, 2020 3 Please see important disclosure information on pages 11 - 18 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Chart 2 - INTC/TSMC Lead on Nodes Intel used to deliver a new transistor every y-axis represents INTC process node / Equivalent TSMC node eight quarters like clockwork, typically, at 45nm least two years ahead of everyone else in the 12 Qs TSMC overtook INTC in industry. transistor leadership 10 Qs However, the move to 14nm FF transistors took 11 quarters, and the move to 10nm took 32nm 11 Qs nearly five years, as TSMC accelerated its transition time to its7nm and 5nm nodes to 6 Qs 22nmFF/20nm, 6 qtrs 16nm FF 6 Qs We chalk this dynamic up to the 9 Qs manufacturing learning curve, which we think 14nm/10nm would argue that TSMC should be a full node 10nm/7nm ahead of INTC. 7nm/5mn 5nm/3nm

8 Qs 8 Qs 11 Qs 18 Qs 12 Qs

Jul-10 Jul-11 Jul-21 Jul-22 Jul-23

Jan-10 Jan-11 Jan-22 Jan-23

Jun-12 Jun-13 Jun-24

Apr-16 Apr-17

Feb-09 Feb-20 Feb-21

Oct-15 Oct-16

Sep-17 Sep-18

Dec-11 Dec-12 Dec-23 Dec-24

Mar-08 Mar-18 Mar-19

Aug-19 Aug-08 Aug-09 Aug-20

Nov-13 Nov-14

May-14 May-15 . Source: Jefferies estimates, company data Chart 3 - AMD Server Unit Share vs. INTC GM Chart 4 - AMD Unit Share 30% 70% F'c F 35% ast ' c 66% AMD's share gain INTC GM a 30% 25% s accelerated after TSMC t 62% gained transistor Desktop Unit leadership in 3Q18 58% 25% Share 20% 20% 54% INTC's losses transistor 20% 55% 21% 15% leadership to TSMC 50% 15% 46% 12% 10% (%) GM INTC NB Unit Share 10% 12%

42% (%) Share Unit AMD

AMD Unit Share (%) Share Unit AMD 8% Server Unit Share 38% 5% 5% Dual Server Unit Dual Server Unit Share 34% Share 0%

0% 30%

2Q16 1Q05 4Q05 3Q06 2Q07 1Q08 4Q08 3Q09 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14 3Q15 1Q17 4Q17 3Q18 2Q19 1Q20

2Q10 3Q12 4Q14 1Q17 1Q08 4Q08 3Q09 1Q11 4Q11 2Q13 1Q14 3Q15 2Q16 4Q17 3Q18 2Q19 1Q20

4Q20E 4Q20E . . Source: Jefferies, Mercury research and Company data Source: Jefferies, Mercury research and Company data

INTC gross margins started declining shortly after it lost transistor The dashed line shows when TSMC surpassed Intel for transistor leadership to TSMC in 3Q18, and AMD announced it was moving its leadership (3Q18), which was when AMD announced it was moving CPU production to TSMC all its CPU and GPUs to TSMC's 7nm process, and about the time AMD share gains vs INTC inflected

October 23, 2020 4 Please see important disclosure information on pages 11 - 18 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Chart 5 - INTC vs. TSMC - CapEx as a % of COGS Chart 6 - INTC vs TSMC ROIC % 100% 50% TSMC's capex intensity Over last 15 years, TSMC's ROIC has improved 90% TSMC declined as INTC's increased 45% and INTC's has been relatively flat 40% 80% 35% 70% TSMC 30%

60% 25%

50% % ROIC 20%

CapEx % of COGS of % CapEx 15% 40% INTC 10% INTC 30% 5% 20%

0%

2015 2016 2017 2018 2019 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E . 2020E . Source: Jefferies, FactSet and Company data Source: Jefferies, Bloomberg, Company data

Over the past 10 years, TSMC's CapEx Intensity has improved as Over the past 10 years, TSMC's ROIC has improved and Intel's has Intel's has gotten worse remained flattish

Chart 7 - INTC vs TSMC Market Capitalization TSMC's market cap surpassed Intel's shortly 450 after it surpassed Intel in transistor leadership 400 TSMC's market cap 350 exceeded INTC in 2019

300

250 INTC 200

150 Market Capitalization ($bn) Capitalization Market 100

50 TSMC

-

2010 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 . Source: Jefferies, FactSet

October 23, 2020 5 Please see important disclosure information on pages 11 - 18 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Chart 8 - INTC vs. TSMC Annualized 300mm Equivalent Capacity Chart 9 - INTC vs. TSMC Cumulative Wafers Last 5 yrs (millions) 70 16 60 14 TSMC

12 50

2019 (millions) 2019 - 10 40 8 30 6 20 4 INTC

2 10 Cumulative Wafers 2015 Wafers Cumulative 0 0

Annualized Capacity (300mm equivalent in mn) in equivalent (300mm Capacity Annualized INTC TSMC

2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 . . Source: Jefferies, Gartner, IC Insight Source: Jefferies, Gartner, IC Insights. INTC's includes 3D NAND capacity of 840,000 wafers

We think the relative performance between TSMC and INTC on We estimate that over the past 5 yrs, TSMC processed nearly 60 the transistor cost curve can be attributed to the manufacturing million wafers, while Intel only processed about 20 million According learning curve effect - i.e., the idea that the cost of an item to Learning Curve economics, this would put TSMC about 1.0-to-1.5 manufactured by company drops by a consistent amount every time transistor nodes ahead of INTC, which is about how far ahead TSMC the production doubles We estimate that TSMC wafer starts has is ahead of INTC now exceeded Intel's each year for the past 10 years, and that TSMC made 3.3x more wafers than Intel did in 2019

Chart 10 - INTC Capex + Capex Intensity Intel's CapEx intensity continues to be in the $20 25% higher end of its historical range INTC's capex intensity is toward the higher end of its historical range

$15 20%

$10 15%

Net capex (TTM), capex Net bn $ $5 10% Net capex as % of sales(TTM) capexNet as of %

$0 5%

3Q13 1Q03 4Q03 3Q04 2Q05 1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 2Q14 1Q15 4Q15 3Q16 2Q17 1Q18 4Q18 3Q19 2Q20

Net capEx (TTM) Net capex as % of sales . Source: Jefferies, Company data

October 23, 2020 6 Please see important disclosure information on pages 11 - 18 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Chart 11 - INTC Results Intel reported 3Q20 non-GAAP EPS of 3Q20A $1.11, $0.01 above consensus on higher Outlook Jefferies Actual Consensus revs and lower OpEx, offset by lower GM. Revs ($bn) $18.2 $18.2 $18.3 $18.2 Revenues at $18.3bn were 50bps above Gross Margin 57.0% 54.8% 56.7% consensus, while GM at 54.8% missed by OpEx ($m) $4.9 $4.7 $4.9 190bps OIE ($M) $0.1 $0.1 $0.0 Tax Rate 15.5% 15.5% 15.3% . Non-GAAP EPS $1.10 $1.10 $1.11 $1.11 Source: Jefferies, Company data, FactSet

Chart 12 - INTC Outlook Sales outlook of $17.4bn is in line with the 4Q20E consensus. GM outlook of 55% is 294bps Jefferies below consensus and OM's outlook of Outlook Consensus 27% is 137bps lower than consensus. (Prior) Intel 4Q20 non-GAAP EPS of $1.10, $0.02 Revs ($bn) $17.4 $17.3 $17.4 above consensus on higher other income Gross Margin 55.0% 59.0% 57.9% Operating Income $4.6 $5.2 $4.8 Operating Margin 27% 30% 28%

. Non-GAAP EPS $1.10 $1.06 $1.07 Source: Jefferies, Company data, FactSet

Chart 13 - INTC EPS Variance EPS of $1.11 is $0.01 above our EPS 3Q20A EPS estimates on better revenues and lower Non-GAAP Jef Estimate Actual ∆ OpEx offset by lower GM Revenue ($M) $18,235 $18,333 $0.01 Gross Margin 57.0% 54.8% ($0.1) OpEx ($M) $4,921 $4,655 $0.05 OIE ($M) $100 $122 $0.00 Tax Rate 15.5% 15.3% $0.00 Dil. Shares 4,264 4,211 $0.01 EPS $1.10 $1.11 $0.01 . Source: Jefferies, Company data; * figures may not sum due to rounding

Chart 14 - INTC Metrics A/R DSOs increased by 1 day QQ andby 3 ($m) 3Q19 2Q20 3Q20 ∆ (Q/Q) ∆ Y/Y days YY. DOI increased by 10 days QQ and Revenues 19,190 19,728 18,333 -7% -4% decreased by 1 day YY COGS 7,895 9,221 8,592 -7% 9% Gross Margin (%) 58.9% 53.3% 53.1% 0% -6% AR 6,880 7,441 7,140 -4% 4% Inventory 8,638 8,969 9,273 3% 7% AR DSO 32 34 35 1 3 . Inventory Days 98 88 97 10 -1 Source: Jefferies, Company data

October 23, 2020 7 Please see important disclosure information on pages 11 - 18 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Chart 15 - INTC Income Statement FINANCIAL STATEMENTS (FYE December) 2020E 2021E 2019 2020E 2021E millions of $ except per share and % items 1Q20 2Q20 3Q20 4Q20E 1Q21E 2Q21E 3Q21E 4Q21E TOTAL REVENUE ($MM) - GAAP $19,828 $19,728 $18,333 17,443 15,599 16,659 18,343 19,179 $71,965 $75,332 $69,781 % Change Q/Q -1.9% -0.5% -7.1% -4.9% -10.6% 6.8% 10.1% 4.6% % Change Y/Y 23.5% 19.5% -4.5% -13.7% -21.3% -15.6% 0.1% 10.0% 1.6% 4.7% -7.4% TOTAL COGS - GAAP 7,812 9,221 8,592 8,198 7,057 7,346 8,053 8,212 29,825 33,823 30,667 % Sales 39.4% 46.7% 46.9% 47.0% 45.2% 44.1% 43.9% 42.8% 41.4% 44.9% 43.9% Amortization of acquisition-related intangibles 289 302 310 349 349 349 349 349 1,124 1,250 1,395 TOTAL COGS - ex amort, acq chg 7,523 8,919 8,282 7,849 6,708 6,997 7,704 7,864 28,701 32,573 29,272 % Sales 39.9% 43.2% 41.9% GROSS PROFIT- GAAP 12,016 10,507 9,741 9,245 8,543 9,314 10,290 10,967 42,140 41,509 39,113 Gross Margin - GAAP 60.6% 53.3% 53.1% 53.0% 54.8% 55.9% 56.1% 57.2% 58.6% 55.1% 56.1% GROSS PROFIT- ex 1x's 12,305 10,809 10,051 9,594 8,892 9,662 10,639 11,316 43,264 42,759 40,509 Gross Margin - ex amort, acq chg 62.1% 54.8% 54.8% 55.0% 57.0% 58.0% 58.0% 59.0% 60.1% 56.8% 58.1% R&D - GAAP 3,275 3,354 3,272 3,403 3,175 3,283 3,449 3,528 13,362 13,304 13,436 % Sales 16.5% 17.0% 17.8% 19.5% 20.4% 19.7% 18.8% 18.4% 18.6% 17.7% 19.3% SG&A - GAAP 1,491 1,397 1,383 1,569 1,439 1,488 1,563 1,599 6,150 5,840 6,089 % Sales 7.5% 7.1% 7.5% 9.0% 9.2% 8.9% 8.5% 8.3% 8.5% 7.8% 8.7% OTHER CHARGES 212 59 27 - - - - - 588 298 - % Sales 1.1% 0.3% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.8% 0.4% 0.0% TOTAL OPEX - GAAP 4,978 4,810 4,682 4,972 4,615 4,771 5,012 5,127 20,100 19,442 19,525 TOTAL OPEX - ex amort, acq chg 4,766 4,751 4,655 4,972 4,615 4,771 5,012 5,127 19,512 19,144 19,525 OPERATING PROFIT- GAAP 7,038 5,697 5,059 4,273 3,928 4,542 5,278 5,840 22,040 22,067 19,588 % Sales 35.5% 28.9% 27.6% 24.5% 25.2% 27.3% 28.8% 30.5% 30.6% 29.3% 28.1% OPERATING PROFIT- ex 1x's 7,539 6,058 5,396 4,622 4,277 4,891 5,626 6,189 23,752 23,615 20,984 % Sales 38.0% 30.7% 29.4% 26.5% 27.4% 29.4% 30.7% 32.3% 33.0% 31.3% 30.1% NET INTEREST & OTHER (GAAP) (424) 238 (18) 696 300 300 300 300 2,023 492 1,200 Ongoing mark-to-market on marketable equity securities 103 (165) 140 (1,155) NET INTEREST & OTHER (Non-GAAP) (321) 73 122 696 300 300 300 300 868 570 1,200 PRETAX PROFIT- GAAP 6,614 5,935 5,041 4,969 4,228 4,842 5,578 6,140 24,063 22,559 20,788 % Sales 33.4% 30.1% 27.5% 28.5% 27.1% 29.1% 30.4% 32.0% 33.4% 29.9% 29.8% PRETAX PROFIT- ex 1x's 7,218 6,131 5,518 5,318 4,577 5,191 5,926 6,489 24,620 24,185 22,184 34.2% 32.1% 31.8% TAXES- GAAP 953 830 765 721 634 726 837 921 3,010 3,269 3,118 Tax rate 14.4% 14.0% 15.2% 14.5% 15.0% 15.0% 15.0% 15.0% 12.5% 14.5% 15.0% TAXES ex 1x's 986 853 843 771 687 779 889 973 2,835 3,453 3,328 Tax rate ex 1x's 14.4% 14.0% 15.2% 14.5% 15.0% 15.0% 15.0% 15.0% 11.5% 14.3% 15.0% NET INCOME- GAAP 5,661 5,105 4,276 4,249 3,594 4,116 4,741 5,219 21,053 19,291 17,670 % Sales 28.6% 25.9% 23.3% 24.4% 23.0% 24.7% 25.8% 27.2% 29.3% 25.6% 25.3% EXTRAORDINARIES, Net of Tax 212 59 27 - - - - - 588 298 - N.I. Non-GAAP (ex amort, acq chg) 6,232 5,278 4,675 4,547 3,890 4,412 5,037 5,516 21,785 20,732 18,856 SBC 449 492 452 452 452 452 452 452 1,705 1,845 1,808 N.I. - Non-GAAP (ex-1x, ex-SBC) 6,322 5,656 4,755 4,701 4,046 4,568 5,193 5,671 23,346 21,434 19,478 EPS - GAAP $1.31 $1.19 $1.02 $1.02 $0.88 $1.02 $1.20 $1.34 $4.71 $4.55 $4.43 EPS - Non-GAAP (ex amort, acq chg, Incl. SBC) $1.45 $1.23 $1.11 $1.10 $0.95 $1.10 $1.27 $1.42 $4.87 $4.89 $4.72 DIVIDENDS PER SHARE $0.33 $0.33 $0.33 $0.33 $0.33 $0.33 $0.33 $0.33 $1.26 $1.32 $1.32 AVG. SHARES - Diluted 4,312 4,284 4,211 4,146 4,097 4,027 3,957 3,887 4,473 4,238 3,992 . AVG. SHARES - Basic 4,266 4,246 4,188 4,123 4,074 4,004 3,934 3,864 4,417 4,206 3,969

October 23, 2020 8 Please see important disclosure information on pages 11 - 18 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Chart 16 - INTC Balance Sheet FINANCIAL STATEMENTS (FYE December) 2020E 2021E 2019 2020E 2021E millions of $ except per share and % items 1Q20 2Q20 3Q20 4Q20E 1Q21E 2Q21E 3Q21E 4Q21E BALANCE SHEET Cash and cash equivalents $ 11,380 $ 8,736 $ 3,356 $ 2,776 $ 8,638 $ 6,944 $ 7,170 $ 7,980 $ 4,194 $ 2,776 $ 7,980 Short-term investments 1,296 4,791 2,987 2,987 1,082 2,987 - Trading assets 8,127 12,288 11,910 11,910 11,910 11,910 11,910 11,910 7,847 11,910 11,910 Accounts receivable 8,455 7,441 7,140 6,285 5,200 5,368 5,707 6,910 7,659 6,285 6,910 Inventory 9,246 8,969 9,273 8,003 7,859 8,162 8,811 8,017 8,744 8,003 8,017 Raw materials 877 903 975 840 - - Work in process 6,654 6,093 6,313 6,225 - - Finished goods 1,715 1,973 1,985 1,679 - - Deferred tax assets - - - Other current assets 2,997 2,165 2,119 3,526 3,526 3,526 3,526 3,526 1,713 3,526 3,526 Assets held for sale - - Total current assets 41,501 44,390 36,785 35,487 37,133 35,910 37,124 38,343 31,239 35,487 38,343 0 0 Property, plant and equipment, net 56,770 58,036 59,205 60,795 57,935 59,118 60,253 61,343 55,386 60,795 61,343 Marketable securities 3,880 3,901 3,679 3,679 3,679 3,679 3,679 3,679 3,967 3,679 3,679 Other long-term investments 2,943 2,884 2,720 2,720 2,720 2,720 2,720 2,720 3,276 2,720 2,720 Goodwill 26,276 26,943 26,955 26,955 26,955 26,955 26,955 26,955 26,276 26,955 26,955 Intangible assets, net 10,429 10,303 9,881 9,435 8,989 8,543 8,097 7,651 10,827 9,435 7,651 Other assets 5,911 6,082 6,036 6,036 6,036 6,036 6,036 6,036 5,553 6,036 6,036 Total assets $ 147,710 $ 152,539 $ 145,261 $ 145,106 $ 143,447 $ 142,960 $ 144,864 $ 146,727 $ 136,524 $ 145,106 $ 146,727 0 0 Current portion of debt 3,464 2,254 504 504 504 504 3,504 6,504 3,693 504 6,504 Accounts payable 4,638 5,045 5,159 4,219 4,108 5,190 4,905 4,227 4,128 4,219 4,227 Accrued compensation and benefits 2,358 2,833 3,197 3,042 2,720 2,905 3,199 3,345 3,853 3,042 3,345 Other liabilities 13,435 12,349 13,252 13,252 13,252 13,252 13,252 13,252 10,636 13,252 13,252 Total current liabilities 23,895 22,481 22,112 21,017 20,584 21,851 24,860 27,327 22,310 21,017 27,327 - - Long-term income taxes payable 4,651 4,795 4,811 4,811 4,811 4,811 4,811 4,811 4,919 4,811 4,811 Contract Liabilities 1,353 1,329 1,381 1,381 1,381 1,381 1,381 1,381 1,368 1,381 1,381 Deferred tax liabilities 2,027 2,723 2,995 2,995 2,995 2,995 2,995 2,995 2,044 2,995 2,995 Long-term debt 36,455 36,093 36,059 36,059 36,059 36,059 36,059 36,059 25,308 36,059 36,059 Other long-term liabilities 2,975 3,108 3,349 3,349 3,349 3,349 3,349 3,349 2,916 3,349 3,349 Total liabilities 71,356 70,529 70,707 69,612 69,179 70,446 73,455 75,922 58,865 69,612 75,922 - - Stockholders' equity: - - Common stock 25,251 25,516 23,335 23,335 23,335 23,335 23,335 23,335 25,261 23,335 23,335 Accumulated other comprehensive income (1,541) (1,152) (940) (3,340) (7,268) (12,268) (17,268) (22,268) (1,280) (3,340) (22,268) Retained earnings 52,644 57,646 52,159 55,499 58,201 61,447 65,342 69,738 53,523 55,499 69,738 Other ------155 - - Total stockholders' equity 76,354 82,010 74,554 75,494 74,268 72,514 71,409 70,805 77,659 75,494 70,805 . Total liabilities and stockholders' equity $ 147,710 $ 152,539 $ 145,261 $ 145,106 $ 143,447 $ 142,960 $ 144,864 $ 146,727 $ 136,524 $ 145,106 $ 146,727

October 23, 2020 9 Please see important disclosure information on pages 11 - 18 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Chart 17 - INTC Cash Flow Statement FINANCIAL STATEMENTS (FYE December) 2020E 2021E 2019 2020E 2021E millions of $ except per share and % items 1Q20 2Q20 3Q20 4Q20E 1Q21E 2Q21E 3Q21E 4Q21E CASH FLOW STATEMENT Net Income (loss) $ 5,661 $ 5,105 $ 4,276 $ 4,249 $ 3,594 $ 4,116 $ 4,741 $ 5,219 $ 21,048 $ 19,291 $ 17,670 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 2,623 2,625 2,677 2,368 2,432 2,475 2,516 2,555 9,204 10,293 9,977 Stock compensation expense 449 492 452 452 452 452 452 452 1,705 1,845 1,808 Amortization of intangible assets 427 438 446 446 446 446 446 446 1,622 1,757 1,784 (Gains) losses on equity investments 134 (226) (13) (892) (105) - (Gains) losses on divestures, sales of assets (690) - - Changes in operating assets and liabilities: - - Trading assets - - - Accounts receivable (796) 1,020 301 855 1,085 (168) (339) (1,204) (935) 1,380 (625) Inventory (548) 277 (299) 1,270 144 (303) (649) 794 (1,481) 700 (14) Other current assets - - - Accounts payable 117 91 147 (940) (111) 1,082 (285) (678) 696 (585) 7 Accrued expenses (compensation and benefits) (1,500) 581 431 (155) (322) 185 294 146 91 (643) 303 Deferred Income taxes payable and receivable 753 450 (710) 885 493 - Other operating assets and liabilities (1,162) 304 471 (1,407) - - - 1,892 (1,794) - Cash provided by (used in) operating activities $ 6,158 $ 11,157 $ 8,179 $ 7,138 $ 7,720 $ 8,284 $ 7,176 $ 7,730 $ 33,145 $ 32,632 $ 30,909

Cash flow from investing activities: Purchase of property and equipment (3,268) (3,408) (3,716) (3,958) (3,500) (3,500) (3,500) (3,500) (16,213) (14,350) (14,000) Proceeds from sale of property, equipment and software 7,000 - - 7,000 Purchases/sales of available-for-sale investments (513) (4,045) (1,765) (2,030) (6,323) - Maturities and sales of available-for-sale investments 625 678 3,734 3,988 5,037 - Purchases of trading assets (3,897) (7,532) (3,315) (9,162) (14,744) - Maturities and sales of trading assets 3,660 3,770 3,797 7,178 11,227 - Investments in non-marketable equity investments 339 2,166 339 - (Acquisition) divestitures (1,047) - - Other (343) (73) 160 715 (256) - Cash provided by (used in) investing activities $ (3,736) $ (10,610) $ (766) $ (3,958) $ (3,500) $ (3,500) $ (3,500) $ 3,500 $ (14,405) $ (19,070) $ (7,000)

Cash flow from financing activities: Increase (decrease) in debt 9,172 (1,700) (1,750) 3,000 3,000 765 5,722 6,000 Proceeds from stock option exercises and ESPP 503 9 385 750 897 - Repurchases of common stock (4,229) - (10,000) (2,400) (3,928) (5,000) (5,000) (5,000) (13,576) (16,629) (18,928) Payment of dividends (1,408) (1,403) (1,404) (1,360) (1,344) (1,321) (1,298) (1,275) (5,576) (5,575) (5,239) Other 726 (97) (24) 72 605 - Cash provided by (used in) financing activities $ 4,764 $ (3,191) $ (12,793) $ (3,760) $ (5,272) $ (6,321) $ (3,298) $ (3,275) $ (17,565) $ (14,980) $ (18,167) Effect of exchange rate fluctuations on cash and cash equivalents . Net change in cash and cash equivalents $ 7,186 $ (2,644) $ (5,380) $ (580) $ (1,053) $ (1,538) $ 378 $ 7,955 $ 1,175 $ (1,418) $ 5,742 Source: Jefferies, Company data

October 23, 2020 10 Please see important disclosure information on pages 11 - 18 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Company Description Intel Intel Corporation is a semiconductor chip maker company. The company develops advanced integrated digital technology products, primarily integrated circuits, for industries, such as computing and communications. The Company designs and manufactures computing and communications components, such as microprocessors, chipsets, motherboards, and wireless and wired connectivity products, as well as platforms that incorporate these components.

Company Valuation/Risks Intel Our $50 PT assumes a 10.6x multiple on our 2021 non-GAAP EPS forecast of $4.72. Our valuation assumes a multiple of 10.6x which falls towards the lower end of INTC's 5 yr PE range of 9x-15x as INTC falls behind TSMC. We believe a low multiple is justified as INTC divests the profit making portion of its Memory business and retains the loss-making portion and lower probability of INTC streamlining SG&A costs. Risks: prolonged demand destruction beyond 2H20 due to COVID-19, decline in PCs; mis-execution on 10nm; and greater competition in servers and PCs.

Advanced Micro Devices, Inc. Our $100 PT assumes P/E ratio of 14.5x on 4-to-5 yr EPS Power of $6.75. A P/E of 14x is within AMD's historical range of 14x-50x range. We think a multiple towards the higher end of the range is justified given that AMD is gaining share as it is undergoing a major sever product cycle when its only competitor is struggling to deliver its roadmap. Risks include weaker sales of PCs, mis-execution and more aggressive pricing from Intel and Nvidia.

NVIDIA Corporation Our $680 PT assumes 67x P/E on our C2021E Non GAAP EPS of $10.10, which is well above the high end of historical range of 16x-54x. We think a higher multiple is justified as NVDA is on a roadmap to grow its EPS by CAGR of ~37% over the next 5-yrs as it builds its ecosystem starting with chips, switch fabrics, software and AI computing systems. A multiple of 67x translates into a PEG ratio of 1.8x which we think is justified. Downside risks include demand destruction due to prolonged outbreak of COVID-19 virus, slower PC Gaming growth and competition from INTC, AMD or new entrants to deep learning market. Upside risks include faster adoption of DL applications in Datacenter and Auto and early containment of COVID-19 virus.

Xilinx Corp Our $130 PT applies a 39x multiple to our $3.36 C'21 EPS. XLNX has traded at NTM P/E multiples in the range of 18x to 40x over the last five years. Coming out of the inventory correction and considering the recent COVID-19 outbreak, we think a PE multiple towards the higher end 5-yr range is justified. Risks include prolonged negative impact due to COVID-19, slowdowns in comm capex, extended inventory correction, share loss, and valuation.

Analyst Certification: I, Mark Lipacis, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I, Vedvati Shrotre, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives compensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgement. Investment Recommendation Record (Article 3(1)e and Article 7 of MAR)

October 23, 2020 11 Please see important disclosure information on pages 11 - 18 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Recommendation Published October 23, 2020 , 04:14 ET. Recommendation Distributed October 23, 2020 , 04:14 ET. Company Specific Disclosures Jefferies Group LLC makes a market in the securities or ADRs of Intel Corporation. Jefferies Group LLC makes a market in the securities or ADRs of NVIDIA Corporation. Jefferies Group LLC makes a market in the securities or ADRs of Xilinx Corp. Within the past twelve months, Jefferies LLC and/or its affiliates received compensation for products and services other than investment banking services from non-investment banking, securities related compensation for client services it provided to Intel Corporation. Within the past twelve months, Jefferies LLC and/or its affiliates received compensation for products and services other than investment banking services from non-investment banking, securities related compensation for client services it provided to Advanced Micro Devices, Inc.. Explanation of Jefferies Ratings Buy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period. Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period. Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-month period. The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or more within a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For Underperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus 20% or less within a 12-month period. NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies. CS - Coverage Suspended. Jefferies has suspended coverage of this company. NC - Not covered. Jefferies does not cover this company. Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securities regulations prohibit certain types of communications, including investment recommendations. Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinions on the investment merits of the company are provided. Valuation Methodology Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns, and return on equity (ROE) over the next 12 months.

Jefferies Franchise Picks Jefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selection is based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/reward ratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the number can vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason for inclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility in the bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intended to represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment style such as growth or value.

October 23, 2020 12 Please see important disclosure information on pages 11 - 18 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Risks which may impede the achievement of our Price Target This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may adversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities such as ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk. Other Companies Mentioned in This Report • Advanced Micro Devices, Inc. (AMD: $79.42, BUY) • NVIDIA Corporation (NVDA: $534.44, BUY) • Xilinx Corp (XLNX: $113.04, BUY)

Rating and Price Target History for: Intel Corporation (INTC) as of 10-22-2020

10/27/2017 UNPF:$32.00 01/26/2018 UNPF:$38.00 04/27/2018 UNPF:$42.00 07/27/2018 UNPF:$44.00 10/26/2018 UNPF:$40.00 01/21/2020 HOLD:$64.00 70

65

60

55

50

45

40 Q3 2018 Q1 Q2 Q3 2019 Q1 Q2 Q3 2020 Q1 Q2 Q3

01/24/2020 HOLD:$65.00 03/25/2020 HOLD:$53.00 04/22/2020 HOLD:$62.00 08/03/2020 HOLD:$54.00

Rating and Price Target History for: Advanced Micro Devices, Inc. (AMD) as of 10-22-2020

07/26/2018 BUY:$22.00 09/03/2018 BUY:$30.00 09/21/2018 BUY:$36.00 10/25/2018 BUY:$30.00 04/23/2019 BUY:$34.00 07/31/2019 BUY:$40.00 11/07/2019 BUY:$42.00 100

80

60

40

20

0 Q3 2018 Q1 Q2 Q3 2019 Q1 Q2 Q3 2020 Q1 Q2 Q3

01/07/2020 BUY:$56.00 01/29/2020 BUY:$58.00 03/06/2020 BUY:$60.00 03/25/2020 BUY:$54.00 04/29/2020 BUY:$63.00 07/29/2020 BUY:$86.00 08/04/2020 BUY:$95.00

10/07/2020 BUY:$100.00

October 23, 2020 13 Please see important disclosure information on pages 11 - 18 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Rating and Price Target History for: NVIDIA Corporation (NVDA) as of 10-22-2020

11/10/2017 BUY:$240.00 02/09/2018 BUY:$300.00 05/11/2018 BUY:$320.00 11/16/2018 BUY:$246.00 01/29/2019 BUY:$185.00 04/23/2019 BUY:$227.00 600

500

400

300

200

100 Q3 2018 Q1 Q2 Q3 2019 Q1 Q2 Q3 2020 Q1 Q2 Q3

05/17/2019 BUY:$210.00 11/15/2019 BUY:$250.00 12/16/2019 BUY:$255.00 02/11/2020 BUY:$315.00 02/14/2020 BUY:$330.00 03/25/2020 BUY:$290.00

05/15/2020 BUY:$370.00 05/22/2020 BUY:$405.00 06/17/2020 BUY:$415.00 08/20/2020 BUY:$570.00 09/14/2020 BUY:$680.00

Rating and Price Target History for: Xilinx Corp (XLNX) as of 10-22-2020

10/25/2017 BUY:$80.00 01/24/2018 BUY:$85.00 01/24/2019 BUY:$105.00 04/23/2019 BUY:$156.00 07/25/2019 BUY:$150.00 10/24/2019 BUY:$130.00 01/29/2020 BUY:$105.00 160

140

120

100

80

60 Q3 2018 Q1 Q2 Q3 2019 Q1 Q2 Q3 2020 Q1 Q2 Q3

03/25/2020 BUY:$90.00 04/23/2020 BUY:$100.00 06/16/2020 BUY:$105.00 06/30/2020 BUY:$115.00 07/31/2020 BUY:$130.00

Notes: Each box in the Rating and Price Target History chart above represents actions over the past three years in which an analyst initiated on a company, made a change to a rating or price target of a company or discontinued coverage of a company. Legend:

I: Initiating Coverage

D: Dropped Coverage

B: Buy

H: Hold

UP: Underperform

October 23, 2020 14 Please see important disclosure information on pages 11 - 18 of this report. EQUITY RESEARCH Intel Corporation (INTC)

Distribution of Ratings Distribution of Ratings

IB Serv./Past12 Mos. JIL Mkt Serv./Past12 Mos.

Count Percent Count Percent Count Percent

BUY 1473 57.70% 129 8.76% 11 0.75%

HOLD 948 37.13% 24 2.53% 6 0.63%

UNDERPERFORM 132 5.17% 1 0.76% 1 0.76%

October 23, 2020 15 Please see important disclosure information on pages 11 - 18 of this report. EQUITY RESEARCH Intel Corporation (INTC)

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October 23, 2020 16 Please see important disclosure information on pages 11 - 18 of this report. EQUITY RESEARCH Intel Corporation (INTC)

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October 23, 2020 17 Please see important disclosure information on pages 11 - 18 of this report. EQUITY RESEARCH Intel Corporation (INTC)

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October 23, 2020 18 Please see important disclosure information on pages 11 - 18 of this report.