Despite a slowdown in the PC market combined with macroeconomic headwinds, Intel (NASDAQ:INTC) managed to post solid Q2 2012 results with a 4% y-o-y increase in revenue. While some of its competitors – such as AMD (NASDAQ:AMD) – registered a sharp decline in earnings, Intel managed to defend its leadership in the PC microprocessor domain by successfully weathering the tough macro conditions.
However, owing to the softness in demand from the developed markets and lower than expected growth from emerging economies, Intel has significantly reduced its 2012 revenue target. While we agree that the short term outlook might be impacted by the above mentioned factors, we are positive on the company’s long-term growth potential. With the upcoming Windows 8 launch and a wide range of ultrabooks and tablet designs in its pipeline, we believe Intel has a lot on its plate to look forward to.
The company is set to announce its Q3 2012 results on Tuesday, October 16, and here are the key factors we will look out for in the earnings release.
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PC Demand From Emerging Markets
Coupled with an unfavorable economic environment, the hard drive shortage that resulted from flooding in Thailand in October 2011 negatively affected the demand for chipsets by PC manufacturers. The impact of the same trickled over to the first half of 2012, leading to a decline in global PC shipment growth rate. 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. 
While the growth in demand from the developed markets are nearing saturation, the relatively untapped emerging markets offer tremendous opportunity for growth for PCs. The Asia-Pacific region contributes over 55% to Intel’s overall revenue and thus remains a significant revenue driver for the company.
Intel has over 80% market share of the global PC market and its microprocessors command a certain premium over competitors such as AMD. The relatively cheaper price of AMD microprocessors could give it an edge in leveraging growth in demand for lower priced PCs from emerging markets. However, while AMD witnessed lower than expected growth from the Asian markets, Intel registered a slight increase in its revenue from these markets last quarter.
Increasing Adoption Of Ultrabooks
After a tepid response for ultrabooks in 2011, due to their steep price, Intel introduced a $300 million fund to achieve improvements in the same. Earlier this year, the company launched its largest advertising campaign in a decade to increase the adoption of Intel powered ultrabooks. Intel claims that the growth in ultrabooks has helped the company achieve its volume goals in the first half of 2012.
While the recent sales figures released by research firm 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 on the same. (Read: Intel’s Ultrabooks: Fail or To Be Determined ?)
Intel has a robust pipeline with over 140 Ivy Bridge designs, out of which 40 will be touch enabled. The company recently entered into an agreement with Integrated Device Technology, Inc. (IDT) to design and deliver integrated transmitter and receiver chipsets for developing wireless charging technology. (Read: New Ultrabook Wireless Charging Feature Could Give Intel An Edge) Additionally, Intel looks confident of delivering the $699 design by this fall, which we feel could further boost sales of ultrabooks.
Growing Focus On Mobile Computing
Intel marked its entry into the lucrative smartphones and tablets market with the launch of first Intel architecture phone by Lava International in April this year. It continued the pace with subsequent launches – Lenovo LePhone 800 and Android smartphone code-named “San Diego”. Earlier in June this year, Microsoft (NASDAQ: MFST) introduced its in-house tablet Surface, which is powered by Intel Core i5 chips and more recently HP chose Intel over ARM architecture for its Windows 8 tablets.
Apart from the booming growth in smartphones and tablets, we feel that other new Atom based devices such as Google TV, car infotainment systems, home and business energy management systems will improve Intel’s Atom processors share by increasing its target market.
Intel claims to have close to 20 tablets in its pipeline up for launch this year. While the company’s progress so far has been encouraging, we believe it has a long way to go before it makes any significant impact in a market dominated by ARM based players such as Qualcomm (NASDAQ:QCOM) and Nvidia (NASDAQ:NVDA).
We have a price estimate 0f $31.94 for Intel, a premium of over 40% to the current market price.Notes:
- IDC Lowers PC Outlook As Shipments Decline In Second Quarter Ahead Of Fall Product Updates, IDC Press Release, August 23, 2012 [↩]