Amid a slowdown in the semiconductor industry in 2010, Intel (NASDAQ:INTC) managed to post around 24% increase in its revenues and retain its No. 1 position for the 20th consecutive year, well ahead of competitors AMD (NYSE:AMD) and Qualcomm (NASDAQ:QCOM). According to research firm Gartner, Intel gained a record market share of 16.5% last year, which gives it additional confidence to face headwinds from a soft economy. ^[1]

But, with the entry of ARM-based players in the PC microprocessor market in 2012, will Intel continue to enjoy its current market share and maintain its dominance in the coming years? It currently enjoys a market share of 83% and 74% in notebooks and desktops, respectively.

With a combined contribution of close to 58% to our price estimate, desktops and notebooks are the most important businesses in Intel’s portfolio, and the direction they take can significantly impact the stock price. Here we analyze some major trends that impact the global PC market as well as the potential threats that Intel may face in these areas.

See our complete analysis for Intel

Hard Disk Drive Shortage to Persist till mid 2012

The hard drive shortage that resulted from flooding in Thailand in October 2011 led to a decrease in demand for chipsets by PC manufacturers, in anticipation of a supply shortage.  This impacted Intel as well as other players who witnessed depressed revenues, and the situation is likely to persist in the first half of this year.

However, we are of the view that Intel might not suffer as much as other competitors such as AMD. Due to the supply shortage,  original equipment manufacturers (OEMs) are likely to give preference to high-end PCs, which might work to Intel’s advantage as it sells higher-priced processors compared to its competitors.

Global PC Trends

Apart from the hard drive shortage, an unfavorable economic environment and threat of cannibalization from tablets and smartphones are additional factors that have moderated the global PC market growth. With growth still being supported by the potential in emerging markets, Gartner estimates that the global PC shipments will grow at a moderate 4.4% in 2012. ^[2] According to our current estimates, the PC sales (excluding netbooks) will grow at 4.7% for the same year.

In addition to the above industry trends, there are certain other factors which might negatively impact Intel’s current dominance in the PC microprocessor market:

Threat From ARM-Based Players

ARM-based players are likely to enter the PC market in 2012, which is expected to crowd the market further. Nvidia (NASDA:NVDA) is one of the players expected to enter the CPU arena with its ARM-based chips by 2013 and could give some competition to Intel. In addition, the entry of Qualcomm in the PC microprocessor market, along with the launch of Windows 8, could further strain Intel’s position.

We believe that with the success of its Opteron chips and next-generation Trinity APUs, AMD could eat away some of Intel’s market share in the desktop division in the coming years which, as per our estimate, will decline y-o-y to reach a level of 66% by the end of our forecast period.

Emerging Markets to Drive Growth in Notebooks

An increasing share of notebooks demand is coming from emerging markets like China, which now represents about 20% of global PC demand. As the consumers in emerging markets have lower per capita income and thus, a lower buying power, there is a possibility of AMD getting leverage in this market with lower-priced notebooks.

Additionally, AMD’s Brazos processor is seeing good adoption in netbooks and thin/light notebooks segment. With Intel’s Ultrabook failing to garner the expected response with its initial launch, AMD will look to gain some share with its price advantage. We see Intel’s market share falling to 77% from the current level.

Despite the potential threat and consequent loss in market share, we feel Intel will continue to hold its dominance over the PC microprocessor market, as the “Intel inside” brand provides Intel the added price premium in the marketplace. Additionally, Intel has consistently left AMD behind in terms of process technology, and has already announced that it intends to increase its capital spending in 2012 to build a factory for 14-nm process technology.

Our current price estimate of $30.62 for Intel, stands at a premium of almost 11% to the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Intel grabs record share of growing chip market, Computer World, April 17, 2012 [↩]
2. PC Shipments Expected to Grow at 4.4% in 2012: Report, International Business Times, March 8, 2012 [↩]