Accounting for a majority share of the PC microprocessor market, Intel’s (NASDAQ:INTC) performance is highly vulnerable to any adverse development in the global PC market. Owing to a persistent slowdown in PC shipments and an insignificant presence in the rapidly growing mobile computing market, Intel cut its 2012 revenue estimate by almost $1 billion in October last year.
At $13.5 billion, Intel’s revenue were flat sequentially in Q3 2012 but declined by 5% on a yearly basis. The company is set to announce its Q4 2012 earnings on Thursday, January 17, and we do not expect the results to be very different than the previous quarter. Though we agree that Intel’s short term growth has slowed, with a price estimate of $32.88, we believe the company has strong fundamentals to support a higher valuation.
Here we discuss certain key trends that would impact Intel’s Q4 2012 results as well as determine its performance in the current year.
Slowing PC Demand
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 shortage trickled over to the first half of 2012, which reduced demand for PC microprocessors. In addition, the increasing popularity of smartphones and the threat of cannibalization from tablets led to a decline in global PC shipment growth rate. Research firm iSuppli projected PC shipments to decline in 2012, the first annual decline in eleven years. 
In light of the uncertain macro environment, Intel’s customers are maintaining a lean inventory which in turn leads to lower demand for its microprocessors. Intel maintained lower factory utilization rates throughout the fourth quarter and targeted reducing its inventory level by almost $0.5 billion. Intel’s inventory increased by approx. $400 million in Q3 2012.
The Windows 8 OS transition was touted as one of the reasons holding back PC demand. However, so far Windows 8 sales have failed to meet Microsoft’s internal projection. While this could be detrimental to the projected global PC growth this year, we feel there are a number of other factors that could fuel demand for Intel-inspired PCs in the future.
New Designs & Lower Price Point Can Fuel Ultrabook Demand
Despite continued efforts to boost demand, Intel powered ultrabooks have been unable to achieve the desired level of popularity. As per research firm IDC, only 500,000 ultrabooks were sold in the first half of 2012 and the number was estimated to reach 1 million for the entire year. At that number, ultrabooks merely account for less than 0.5% of worldwide notebook PC shipments in 2012. 
In the coming months, Intel plans to introduce more than 140 core-based Ultrabooks, more than 40 of which will be touch-enabled. Aiming to combine the productivity of a PC with the convenience of a tablet, Intel intends to launch a dozen convertible Ultrabook designs.
At the recently concluded CES 2013, Intel announced a low power 7-watt version of Ivy Bridge line of processors for ultrabooks. The low power line of processors will enable OEMs to have greater flexibility in designing thinner and lighter touch based ultrabook convertibles. In addition, it will also introduce its 4th generation core processor family, code-named Haswell, later this year. The processor promises to offer up to 13 hours of battery life, in turn enabling a broad new range of ultrabook convertibles, detachables and tablets.
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 of 2012 was $927.  Ultrabook prices have come down since then to as low as $699 and Intel intends to further reduce the price to $599 by the year end. We feel that a more competitive price range can be an important factor to accelerate ultrabook adoption.
New Platforms Could Expand Presence In Mobile Computing
Determined to be the front-runner in the global technology revolution and focused to stay abreast of changing consumer preferences, Intel marked its entry in the lucrative smartphone and tablet markets last year. However, the company has yet to make a significant dent in the same. Intel currently has six phones and 10 tablets powered by its mobile processors (does not include the convertible PCs that act as tablets). 
Accelerating its progress in the mobile market was Intel’s key focus at CES 2013. Introducing a new low-power Atom processor based platform Lexington, the company aims to target the fast growing low-end smartphone and tablet market, a segment that is estimated to reach 500 million units by 2015. 
Intel also announced details about its first quad-core Atom system-on-chip (SoC), code named Bay Trail. With over two times the computing performance of its current generation tablet offering, Intel claims that the upcoming processor will be the most powerful Atom processor offered by the company. In addition to better performance, it will also offer an improved battery life and include improved integrated security offerings.
Though the mobile computing market is increasingly dominated by ARM technology based players such as Qualcomm (NASDAQ:QCOM) and Nvidia (NASDAQ:NVDA), we feel that with a strong road-map for the future Intel can increase its share in the market.
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 available market.
Our price estimate of $32.88 for Intel is at a considerable premium to the current market price.Notes:
- PC shipments to fall for the first time in 11 years – forecast, CNN Money, October 10, 2012 [↩]
- Are Ultrabooks an epic failure?, Digital Trends, July 2012, 2012 [↩]
- Are Ultrabooks an epic failure?, Digital Trends, July 12, 2012 [↩]
- CES: Intel still struggling to crack smartphone and tablet markets, MercuryNews.com, January 9, 2013 [↩]
- Intel Delivers Broad Range of New Mobile Experiences, Intel Newsroom, January 7, 2013 [↩]