Intel Is Still Undervalued Despite Lower Q3 Growth Target

Despite tough macroeconomic conditions, Intel (NASDAQ:INTC) posted strong Q2 2012 earnings with a 4% y-o-y increase in revenues and was hopeful of slight growth in the current quarter as well. (Read: Intel Weathers Soft PC Market With Healthy Q2 Results) On the contrary, some of the company’s competitors such as AMD (NASDAQ:AMD) registered a sharp decline in their Q2 2012 earnings, while others such as Texas Instruments (NASDAQ:TXN) posted a cautious outlook for the current quarter on account of lack of visibility of orders from customers and distributors.

However, with Intel soon following suit by reducing its Q3 2012 revenue target by almost $1 billion, from $13.8-14.8 billion to $13.2 billion, it looks like the current slowdown in the semiconductor industry has yet to mark its bottom. The company also reduced its forecast for its Q3 2012 gross margins by 1%, from the previous estimate of 63%.

See our complete analysis for Intel

The slowdown in the global PC shipments growth rate has been due to a combination of various factors – hard disk drive shortage due to floods in Thailand last year, slow demand in developed countries, a slowdown in demand growth from emerging economies and macroeconomic headwinds in general. Additionally, with the increasing adoption of smartphones and tablets around the world, the growing sales of mobile devices has also cannibalized PC sales to some extent.

Though Intel marked its entry in the coveted mobile computing space, it has yet to make a significant impact in the market which is heavily dominated by ARM-based players such as Qualcomm (NASDAQ:QCOM), Texas Instruments and Nvidia (NASDAQ:NVDA). We estimate Intel to derive over 85% of its value directly or indirectly from the PC market. The company has been reining in the PC microprocessor domain for the past two decades and continues to account for a majority of the market.

We estimate Intel to register only a slight increase in revenues in 2012, but forecast the same to grow at a robust rate for the rest of our forecast period. We feel that the current slowdown is more on account of the soft macroeconomic conditions and continue to believe that Intel has strong fundamentals to support a higher valuation.

With the upcoming Windows 8 OS launch and the entry of ARM-based players in the PC microprocessor market, we expect to see a revival in PC shipments by the end of this year or early next year. Research firm IDC forecasts PC shipments to grow at a mere 0.9 % in 2012 but estimates the worldwide PC shipment growth to average around 7.1% from 2013-2016. ^[1]

We have a price estimate 0f $31.94 for Intel, a premium of over 30% to the current market price.

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1. IDC Lowers PC Outlook As Shipments Decline In Second Quarter Ahead Of Fall Product Updates, IDC Press Release, August 23, 2012 [↩]