Intel’s $33 Valuation At Risk If Apple Dumps PC Chips

by Trefis Team
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Peaking at $29 in May this year, Intel’s (NASDAQ:INTC) stock has been treading a downward journey since then on account of the stagnating PC market. To stay abreast of changing consumer trends, Intel marked its entry in the mobile computing space; however the company has yet to make any significant impact in the same. PCs remain the backbone of Intel’s business, and the company has been dominating the market over the last two decades with a current market share of over 80%. This accounts for 60% of our value for Intel. However, according to recent reports, Apple could be working towards developing its own chips for PCs that would replace Intel processors in its future designs invariably casting a dark cloud over Intel’s future. [1]

With the increasing popularity and growing adoption of smartphone and tablets around the world, mobile devices are slated to replace PCs as the future engine of growth for the semiconductor industry. Apple (NASDAQ: AAPL) accounts for a majority share in the tablet market and is one of the leading players in the PC and smartphone segments. While the company uses ARM’s technology to design its iPhones and iPads, it has been sourcing PC processors from Intel for its Macbooks since 2005.

See our complete analysis for Intel

Intel chips are known to be faster and generate less heat. However, Apple seems concerned about Intel’s ability to produce lower-power consuming chips, which are more suitable for smartphones, tablets and upcoming ultrathin notebooks. Using its own custom design for the iPhone, iPad, Apple TV and the iPod Touch, Apple feels confident that chip designs used for its mobile devices could one day be powerful enough to run its PCs. [2] In the last few years, Apple has acquired chip companies, added engineers and developed designs for its iPhones and iPads based on the ARM technology.

What Could Be The Possible Impact On Intel’s Valuation?

While the switch might not come about for years to come, it could serve a blow to Intel if some of its other customers follow suit by switching over to ARM’s technology.

Intel does not quantify Apple’s contribution to its total revenue in the annual filings. However, it does mention that apart from HP and Dell, which accounted for 19% and 15% of Intel’s revenue in 2011, all other customers contribute less than 10% to Intel’s revenue. There will only be a marginal decline of around 3%, according to our estimate, if Apple drops Intel processors from its future Macbook designs. (See Note 1 for calculation)

However, if other customers follow suit there could be a greater downside in Intel’s valuation. Additionally, there are other ARM-based players, such as Nvidia (NASDAQ:NVDA), which are expected to enter the PC microprocessor market in the future. We do anticipate a marginal decline in Intel’s market share in notebook processors on account of increasing competition from ARM. However, there is a possibility of the anticipated decline being higher than our estimate, in which case there would be a further downside in our price estimate.

Note 1: If we reduce 10% of Intel’s revenue 2016 onwards, by reducing its market share to that extent, we get a price estimate of $31.71. We have made the following assumptions:

- Intel earns 10% of it notebook processor revenue from Apple.

- The percentage contribution remains the same during our forecast period.

- Intel stops supplying its microprocessor to Apple 2016 onwards.

You can change the estimates in the graph above to study the resultant impact on Intel’s valuation.

We are in the process of updating our price estimate 0f $31.94 for Intel for the latest quarter earnings.

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Notes:
  1. Apple Said to Be Exploring Switch From Intel for Mac, Bloomberg, November 6, 2012 []
  2. Mac could ditch Intel chips for in-house product, Mac.Blorge, November 6, 2012 []
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