Dominating the PC microprocessor market for the last two decades, Intel’s (NASDAQ:INTC) growth has slowed down recently on account of weakness in the global PC market. The company reported its full year 2012 earnings on January 17 with 1.2% and 15% declines in annual revenue and net income, respectively. However, Intel generated approximately $18.9 billion in cash from its operations highlighting that it is managing its operations well amid macro weakness.
At $13.5 billion, the Q4 2012 earnings were in-line with Intel’s expectation. While revenue declined marginally on a y-o-y basis, gross profit was 31% lower compared to Q4 2011. Though Intel’s data center group witnessed strong sequential and annual growth, a continuous decline in revenue from the PC client growth combined with increasing investment in building its technology prowess has impacted Intel’s bottom-line.
Nevertheless, 2012 has been an eventful year for Intel as the company made significant progress in alternate markets with new product launches and design wins. For 2013, it has a robust pipeline of new platforms and products, which we feel will help increase Intel’s competitiveness in the market. While Intel’s short-term growth might suffer from the PC slowdown and a small footprint in the mobile computing market, we believe the company has strong fundamentals to support a higher valuation. (Read: Intel Should Be A $33 Stock As Market Overlooks Chip Dominance)
Here we review certain significant developments in 2012 as well as Intel’s product road-map for 2013 which can help Intel regain its growth momentum in the future.
Overhaul 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. Last year, it 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. Intel ramped up its ultrabook designs from 20 to 140+ in the last one year. Additionally, 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.
However, despite Intel’s efforts, Ultrabooks are estimated to 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. As the line between PCs and tablets is blurring, Intel intends to focus on developing more convertibles and detachable ultrabook designs in the future.
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.
Milestone Year For Tablets & Smartphones
With the slowdown in PC shipments growth rate and the increasing adoption of mobile devices, smartphones and tablets are slated to fuel future growth in the semiconductor industry. Intel marked its entry in the mobile market at the start of 2012 and currently has 7 phones and 10 tablets shipping across 20 countries. Intel processors support the Windows 8 and the Android operating system and it claims that they can compete with the best ARM designs on performance and have equal or better power and battery life.
While most of its phones use the 32-nanometer Medfield SoC, the introduction of the 22-nanometer manufacturing process resulted in more than half of Intel’s Q4 2012 volume using the new technology.
Intel will start shipping a new, low-power Atom processor based platform – Lexington – which will target the fast growing low-end smartphone and tablet market, a segment that is estimated to reach 500 million units by 2015.  Additionally, 2013 will see Intel’s first quad-core Atom system-on-chip (SoC), code named Bay Trail, that will have over two times the computing performance of its current generation tablet offering.
Strategic Relationship With ASML
Within the semiconductor industry, Intel is known to have huge R&D capabilities. It is also the only chip maker with its own manufacturing, design and fabrication capabilities which makes it less dependent on other companies. In July 2012, Intel pumped in $4.1 billion into ASML Holdings (NASDAQ:ASML) to fund the next generation chipmaking technology. (Read: Intel Pumps $4 Billion Into ASML Holdings To Accelerate Next-Generation Manufacturing Technology)
Intel continues to invest in its manufacturing leadership. In 2012, it ramped up its 22-nanometer factories and intends to start production on the 14-nanometer process this year. Intel purchased $11 billion in capital assets and invested more than $10 billion in R&D in 2012.
In addition to above developments, Intel’s data center group also underwent a comprehensive renewal across its product line, which we feel will contribute to higher revenue from this segment in the future.
The semiconductor industry is undergoing a period of transition and innovation. With a robust portfolio of new platforms and products, we feel Intel is well positioned to leverage growth across the wide range of devices, from low power portable devices to powerful data centers.
Outlook For 2013
- Revenue to grow in low-single digits
- Data center group to witness double-digit revenue growth
- Spending to increase to $18.9 billion, a $700 million increase
- Mid-point of gross margin range is 60%
- Capex to remain close to 2012 level
- Estimated spending of $2 billion to start building its first 450-millimeter development facility
We are in the process of updating our price estimate of $32.88 for Intel.Notes:
- Are Ultrabooks an epic failure?, Digital Trends, July 2012, 2012 [↩]
- Intel Delivers Broad Range of New Mobile Experiences, Intel Newsroom, January 7, 2013 [↩]