Our rating on the technology sector is overweight; we believe CIOs and IT managers are becoming more accustomed to transformative technology, including virtualization and cloud, big data, analytics, software-defined networking, and everything-as-a-service, explains analyst Jim Kelleher of Argus Research.
The sorting-out period—in which companies adapted to increased software content and reduced hardware intensity—is now being followed by increased investment in these areas.
Buy-rated Intel Corp. (INTC) has announced a definitive agreement to acquire Altera Corp. (ALTR) for $54 per share, for a deal value of $16.7 billion. Intel is expected to close the acquisition in six to nine months.
Altera has been working with Intel for over a year to ready production of its most advanced FPGAs for 10 nm production node. In this case, familiarity bred mutual interest.
Acquiring Altera gives Intel an instant No. 2 presence in field programmable gate arrays (FPGAs), along with the full suite of accompanying software and services.
While Intel is paying a steep price by any measure for Altera, Intel immediately improves its position in data center and in future markets such as the Internet of Things.
New products that integrate both Xeon processors and FPGAs will be available by 2H16. Meanwhile, Altera is viable and profitable on its own, with 40% FPGA market share and leadership in smaller nodes.
Replicating Altera’s product set and market opportunity, by contrast, would be near impossible and at least as expensive as the high price Intel is paying.
INTC shares look attractive on price-based historical comparable valuations and on our more forward-looking discounted free cash flow valuation. We reiterate our buy rating on INTC with a 12-month target price of $41 per share.
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