Intel’s Ultrabooks: Fail or To Be Determined?

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With increased mobility and flexibility, notebooks have been growing much faster than desktops. Contributing close to 35% to Intel’s (NASDAQ:INTC) valuation, we estimate “notebook processors” to be the most important division in the company’s portfolio. Intel has been dominating the PC market for the last two decades and remains the leader in notebook processors, however, we estimate its market share to have dropped marginally from 87% in 2008 to 84.3% in 2011.

The launch of Intel powered ultrabooks last fall failed to garner much attention due to their steep price. Ultrabooks are ultra-thin notebooks that aim to fill in the gap between lightweight laptops and tablets. Since their inception, Intel has been banking on ultrabooks to fuel the growth in PC shipments. Earlier this year, the company introduced a $300 million funding to achieve improvements in Ultrabooks and launched its largest advertising campaign in a decade. Although the recent sales figures released by the IDC indicate that ultrabooks are having a tough time gaining acceptance among users, we feel that it might be too soon to make a judgement call.

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See our complete analysis for Intel

Lackluster Ultrabooks Sales in The First Half of 2012

Research firm IDC estimates that only 500,000 ultrabooks have been sold so far this year. [1] We estimate global notebook shipments to reach $188 million by the end of 2012. Based on that forecast, Intel seems to be behind its estimate that ultrabooks will reach 40% of consumer notebooks by year-end. However, there are certain factors which could point to a better performance in the latter half of 2012 and 2013 on:

1. 140 Ultrabooks Designs: At present Intel has around 35 ultrabooks that are powered by a range of third generation Intel core processors in the market. However, the company confirms that it has over 110 additional designs in the pipeline that are up for launch in the coming year.

2. Lower Prices: According to consumer market research firm NPD, the average market price for a Windows notebook is $510 whereas the average selling price for ultrabooks for the first five months for the year was $927. [2] However, ultrabook prices have come down since then to as low as $699 with the Sandy Bridge edition of the Dell Inspiron 14z. We feel that a more competitive price range can be an important factor that accelerates ultrabook adoption among users.

3. Ivy Bridge Ultrabooks & Launch of Intel’s 4th Generation Processors: Intel’s Ivy bridge processor, which offers significantly higher graphics and improved CPU performance, has been in the market for only a short period of time. Thus, we feel that Intel is yet to realize the full benefits of the advanced processor.

In addition, Intel is already working on its next generation processor, Haswell, which it claims not only provides superior performance but also consumes 20 times less power than the Ivy Bridge processors. The company plans to introduce the new processors to the market by 2013.

4. Touch Enabled & Convertible Ultrabooks: With around 40 touch enabled ultrabooks expected to be launched by year-end, Intel looks determined to take its processing power a notch higher. [3] At the recently held Computex 2012, the company announced that it has signed several agreements with some leading touch paneled manufacturers to adequately cater to the expected demand for touch-enabled notebooks over the next several years. Another thing to look forward to will be the hybrids and convertible Ultrabooks which are expected to be launched with Microsoft’s (NASDAQ:MSFT) Windows 8 OS.

Also, the upcoming Windows 8 launch can also reignite the PC market, thus driving up sales in the latter part of the year. However, the expected entry of ARM based players and the increasing popularity of AMD’s (NYSE:AMD) Trinity processors still remain major roadblocks for the success of Intel’s Ultrabooks. Additionally, the increasing adoption of smartphones and tablets could be a headwind to the growth of notebook shipments in the future.

For the time being, we maintain our belief that Intel will see a slight decline in its notebook processors market share, though it will continue to account for a substantial majority of the market.

We have a price estimate 0f $31.94 for Intel, a premium of close to 20% to the current market price.

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

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 shortage in supplies. The impact of the shortage resulted in depressed revenues for Intel and almost all its competitors and is likely to persist till the first half of this year.

However, we feel that due to the supply shortage OEMs (original equipment manufacturers) are likely to give preference to high-end PCs, which might become advantageous to Intel, as it sells lower-priced processors compared to its competitors AMD.

Notes:
  1. IDC: Only 500K Ultrabooks Sold So Far, Tom’s Hardware, July 15, 2012 []
  2. Are Ultrabooks an epic failure?, Digital Trends, July 12, 2012 []
  3. Intel Announces 40 Touchscreen Win8 Ultrabooks, Pricing Down to $699 & SoC for PC in 2013, netbooknews.com, July 30, 2012 []