While rival AMD (NYSE:AMD) cut its estimates substantially a week before its Q2 earnings, predicting a sequential decline of 11% in its revenues, Intel (NASDAQ:INTC) posted a healthy second quarter this year with a 4% y-o-y increase in revenues. Though, Intel claims that the industry continues to be impacted by softness in demand from the developed markets and a lower than expected growth from emerging economies, it once again successfully weathered a tough market proving its supremacy in the PC microprocessor domain.
While the PC group witnessed a 4% y-o-y increase, the data center group registered a strong quarter with a 15% y-o-y increase. The growth in demand from enterprises in emerging markets, slightly offset by a weakness in developed markets, contributed to the growth in the data center group.
With a wide range of ultrabooks and tablets in the pipeline along with the upcoming Windows 8 launch later this year, we are optimistic about the growth prospects of the company. However, based on the current weakness in the global macroeconomic environment and a lower inventory maintained by customers on account of weaker demand, Intel has reduced its estimate to 3-5% annual revenue growth as opposed to its prior expectation of a high single digit growth.
Muted Growth Scenario In Emerging Markets
Though the growth in PC demand in emerging economies (such as China, Brazil and India) is higher than most developed markets, the company claims that it is lower than what they had initially expected. This could primarily be on account of two reasons: firstly, the subsiding GDP growth rate in most emerging economies is weighing on aggregate demand; and secondly, the increase in PC prices as a result of currency fluctuations against the dollar. Most PC components are sold in dollars, and thus, the volatility in exchange rates might be suppressing the potential demand from the emerging economies.
However, we believe that this is more of a short term phenomena and estimate the growing potential in emerging markets to fuel growth in global PC shipments in future. We forecast the PC sales (excluding netbooks) to register 4.7% growth in 2012.
Robust Pipeline For Ultrabooks & Tablets
Though the steep price of ultrabooks was a cause of concern for many, Intel claims that growth in ultrabooks helped achieve the company’s volume goals in the first half of 2012. Additionally, the introduction of medfield-based phones from Lava International, Lenovo and Orange earlier this year, launched Intel in the lucrative mobile computing space. The company seems to have a robust pipeline with over 140 Ivy Bridge designs, out of which 40 will be touch enabled, and more than 20 tablets in the works. Additionally, Intel looks confident of delivering the $699 design by this fall, which we feel could further boost sales of ultrabooks.
Thus while weakness in the global PC market might be slowing down the growth rate for Intel and its competitors, we feel that significant design wins in the fastest growing segments of ultrabooks, smartphones and tablets put the company in a positive limelight.
We are in the process of updating our price estimate of $30.62 for Intel post Q2 2012 earnings.