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Investment Overview for Intel (NASDAQ:INTC)
Below are key drivers of Intel's value that present opportunities for upside or downside to the current Trefis price estimate for Intel:
IoT becomes a bigger part of Intel's business
- Having missed out on the mobile revolution, Intel is determined to be an early entrant in the Internet-of-Things (IoT) market, which is considered to be the next big wave in computing. Last year, the company changed its reporting structure and made IoT a stand-alone segment, underlining its growing focus on the business. Intel currently derives approximately 5% of its revenue from IoT and we expect the segment will account for approximately 10% of Intel’s total revenue by 2022. Research firm IoT Analytics recently placed Intel at the head of the top 20 IoT companies. If Intel’s IoT revenue increases to $20 billion by the end of our review period (versus our current estimate of $7 billion), there will be an approximate 10% upside to our price estimate.
Steeper decline in Intel’s server market share
Having lost market share to AMD several years back, Intel has steadily regained its share in the server processor market, with its market share increasing from 85% in 2007 to 98% at present. Intel’s data center business continues to see robust growth as a result of the build-out of the cloud, data analytics and a strong product portfolio. If AMD manages to accelerate its progress in the server processor market and its collaboration with ARM helps the company increase its market share to historical levels, it can have a considerable impact on Intel’s valuation. If Intel’s server market share declines to as low as 50% (as compared to our current estimate of 93%) over our review period, it will lead to an approximate 10% decline in our price estimate.
Declining PC Processors EBITDA Margin
- New improved process technology and higher average selling price helped Intel increase its operating margin between 2007 and 2011. However, with increasing competition combined with macro headwinds, the Processor EBITDA Margin declined marginally in 2012 and 2013, but increased again in 2014. We expect only a slight decline in margins over our review period. However, the company could see a steeper decline in margins owing to the start-up costs related to the 10 nm process technology and the entrance of ARM-based players in the PC microprocessor market. If Intel’s desktop EBITDA Margin and notebooks EBITDA Margin decline to 35%, there could be a 15% downside to our valuation for the company.
For additional details, select a driver above or select a division from the interactive Trefis split for Intel at the top of the page.
Intel manufactures and markets microprocessors used in servers, desktops and notebooks. Microprocessors are a PC's central processing unit (CPU) or the brain behind the computer. A microprocessor is the single most important component that drives computer's power and performance.
Intel also manufactures chipsets used in desktops, notebooks and wireless devices. A chipset operates as the PC's nervous system, sending data between the microprocessor and input, display and storage devices such as the keyboard, mouse, monitor, hard drive and CD or DVD drive.
Earlier this year, Intel acquired Altera, a leading fabless vendor of Field Programmable Gate Arrays (FPGAs), for $16.7 billion. The acquisition is expected to close in the next 2-3 quarters. By acquiring Altera, Intel hopes to further diversify its addressed markets, expand its line-up of higher-margin chips used in data centers, and reduce its dependence on the shrinking PC market.
On-Going Server Virtualization
Server virtualization is essentially server consolidation that enables running multiple applications on a single server instead of on multiple servers. Server virtualization is driving a mix shift to higher-end servers, which requires multi-core processor servers that tend to be more complex and more expensive than traditional single core processors.
Increasing Importance of Smartphone and Tablet Chips
While PC shipments have declined drastically in the last few years, mobile shipments (particularly smartphones and tablets) have grown at a robust rate. Though growth rate has slowed as developed markets near saturation, mobile shipments continue to expand at a fast pace.
IDC estimates the global tablet shipments to rise to cross 380 million units by 2017, compared to 117 million units in 2012.
Gartner estimates that more than 8 billion smartphones will be sold over the next five year period, through calendar 2018. The installed base will reach approximately 4.4 billion, representing the largest technology platform on which to innovate and drive upgrade opportunities.(Source)
Intel accounts for 4% – 5% of the global tablet market (the share increased in 2014 though we don't have the exact no. yet). Its share in smartphones is less than 1%
Convergence of Graphics & Processing
With the introduction of Intel's Sandy Bridge processors and AMD's Llano processors both companies have moved away from the idea of integrated graphics. These chips pack GPU within the CPU leading to much better graphics performance than one can get from traditional integrated graphics.
PC Market Opening up to ARM
Windows 8 is ARM-compatible which marks the entry of ARM-based processor manufacturers in the PC market, which has traditionally been dominated by x86 processor architecture. This will challenge the dominance of Intel which could lose some market share in the future, on account of increasing competition.
Growth in The Internet-of-Things (IoT) Market
Gartner estimates the IoT market to grow almost 30 times, from an installed base of 0.9 billion in 2009 to 26 billion by 2020. It will result in $1.9 trillion in global economic value-add through sales into diverse end markets. (Link)
Wearable devices, clothing and accessories incorporating computer and advanced electronic technologies, is a subset of the IoT market and is considered to be the next big wave in computing. Juniper Research estimates the wearable computing device shipments to increase from 15 million units in 2013 to 150 million units by 2018. ABI Research forecast the figure to cross 450 million units during the same period. (Link)
Intel was a late entrant in the mobile computing space and for this reason does not (yet) have a very large presence in the market. However, the computing giant is keen not to miss the next big wave in computing – Internet-of-things.
In 2014, Intel completed its acquisition of Basis Science, which specializes in wearable device technologies for health and wellness applications. This gives Intel an immediate entry into the wearable devices market. The company intends to build upon this foundation to deliver new products that offer greater utility and value to its customers. Intel has been investing in a wide range of start-ups in the wearables space, and has also tied up with some fashion houses to market wearable gear as a fashion accessory rather than just a device that monitors your health (and more)
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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