Amid the slowdown of the PC market in 2011, Intel (NASDAQ:INTC) managed to maintain its dominant position as market leader of the PC microprocessor industry. Despite revenues declining by 7% q-o-q and 2% y-o-y in the first quarter, we are of the view that the company performed well in a tough market and has a lot on its plate in the current year to look forward to. With the much awaited entry in the smartphone and tablets segments, the company competes with established ARM based players such as Qualcomm (NASDAQ:QCOM), Nvidia (NASDAQ:NVDA) and Texas Instruments (NYSE:TXN).
Intel Powered Smartphones
In January, Intel made announcements with Lenovo and Motorola at CES to launch Intel-powered smartphones, followed by announcing designs for Orange, ZTE and Lava at the Mobile World Congress in February. This week saw the launch of XOLO X900, world’s first Intel architecture based (Medfield Platform) smartphone, by Lava International.
For more than a year Intel talked about making an aggressive push into the mobile computing space, challenging chip designer ARM Holding’s dominance in the lucrative smartphone and tablet market. This year marks the entry of the largest chip maker in one of the fastest growing technology segments of smartphones and tablets. Lava will soon be followed by Lenovo, which plans to launch its Intel-based smartphone by the end of May 2012.
According to research firm IDC, the smartphone shipments will grow from 494 million in 2011 to 1.16 billion in 2016. For 2012, it predicts that the worldwide smartphone shipment will reach 660 million. 
Intel’s share in the smartphone and tablet markets is not very significant; so, we do not see the launch to have a significant effect on its current price. However, considering the growing potential in this segment, the future launch of other Intel-based smartphones could increase its share in the smartphone and tablet segments.
Recovery from Hard Disk Shortage
Due to the flooding in Thailand in October 2011, the HDD market witnessed a y-o-y decline of 4.5% in 2011.  The resultant supply shortage led to a downward trend in the industry which extended till Q1 2012. As per IDC, the PC shipment grew by 1.9% in Q1 2012. 
We estimate that this year will witness an annual growth of 4.7% for PCs (excluding netbooks). The improved supply of hard disk drives, combined with improving job growth in the U.S. and the stabilization of sovereign debt issues in Europe, could lead to an upside to our estimate. Considering that the notebook and desktop processor business together accounts for nearly 52% of our price estimate for Intel, the speedy recovery in the PC market is important for the company.
Growing Demand in Emerging Economies
The Asia Pacific region, which offers greater potential compared to the saturated market in developed countries, continues to be an important part of Intel’s portfolio. The region contributed 57% to Intel’s revenue in Q1 2012, in-line with previous quarter’s. IDC’s preliminary results show that the Asia Pacific (excluding Japan) PC market declined 2% sequentially but grew 3% year-on-year in Q1 2012 to reach 29.4 million unit.  The HDD shortage could have had some impact on the number here. But with the situation improving, the growth rate in this region is slated to go up in the year ahead. The Asia Pacific region is not only driving demand in the PC shipment market, but is also expected to be a major driving factor in the growth of smartphones in the coming years.
In addition to the Atom Medfield chips, Intel is expected to roll out additional 2-nanometer Ivy Bridge chips that will be used to power the next round of Ultrabooks and make their way into tablets. Ivy Bridge chips are expected to offer better performance and significantly greater power efficiency and graphics capabilities than the current “Sandy Bridge” offerings. The launch of other Intel processor smartphones, the move to Tri-Gate transistors, and the upcoming launch of Centerton – the atom-based micro server System on Chip – are some major developments that we look forward to this year.
Based on the recent developments, we have revised our current price estimate for Intel to $30.82.Notes:
- Smartphone shipments to top 1 billion by 2012, Claims IDC, Mobile Burn, March 29, 2012 [↩]
- IDC Forecasts Hard Disk Drive Industry Will Return to Growth After a Difficult 2011, IDC Press Release, April 2, 2012 [↩]
- Worldwide PC Microprocessor Revenues in 2011 Rise 13.2% Compared to 2010, IDC Press Release, March 22, 2012 [↩]
- The Asia/Pacific PC Market Starts the Year Modestly With 3% Growth in 2012 Q1, IDC Press Release, April 19, 2012 [↩]