On Jan. 3, Intel (INTC) held a call to address concerns voiced by a report from The Register the day prior regarding a “design flaw” in Intel’s chips that makes them vulnerable to security breaches. Management confirmed the new method for an attacker to observe contents of privileged memory, bypassing expected privileged levels to expose sensitive data such as passwords and encryption keys, consistent with The Register report. However, Stephen Smith, general manager of Intel’s data center engineering group, also struck a defensive tone when discussing whether the issue was unique to Intel’s chips, claiming the attack method is not unique to any one architecture or processor and is unable to disrupt the services performed by the chip, inject malicious code, or corrupt memory. As we had previously expected, Smith also cited an industrywide collaboration to mitigate the issue, and downplayed the performance degradation stemming from the operating system and firmware updates. Crucially, for investors, Smith noted he doesn’t expect Intel to incur meaningful costs to remedy the issue.
We note shares of Intel rebounded slightly in the aftermath of its press release articulating the points made in the call, while shares of AMD retreated slightly from intraday highs. Our biggest takeaway is that the average computer user should not see any significant performance impacts, contrary to earlier speculation. Nevertheless, Intel will remain under scrutiny as it rolls out its mitigation solutions and the performance of “cured systems” is intensely analyzed. We are maintaining our wide moat rating and $36 fair value estimate for Intel, and we continue to see shares as overvalued due to potential execution risk following its recent acquisitions and pivoting into new artificial intelligence and automotive end markets. Our no-moat rating and $9 fair value estimate for AMD is also reiterated, and we believe the market is overoptimistic on the firm’s prospects against Intel and Nvidia.
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