Intel (NASDAQ:INTC), the leading microprocessor manufacturer, derives over 60% of its revenue from the PC market and thus its business has been hit by declining PC shipments. However, with a new CEO Intel has taken significant steps to reorganize in the last few months, which the company claims has improved decision making and contributed to greater accountability. Additionally, in an effort to stay in line with the changing technology landscape, Intel has made several strategy and priority changes.
Our price estimate of $29.21 for Intel is at a premium of around 30% to the current market price. In this article we discuss the primary factors that reiterate our belief in the company’s long term growth potential.
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New Products & Lower Price Points Can Improve PC Microprocessor Demand
The cannibalization by tablets and smartphones combined with a weak reception for Windows 8 OS, the slowing enterprise market, consumer softness in mature markets and slowing demand from emerging markets are the key factors leading to a slump in the PC market. PC sales declined marginally in 2012, and research firm IDC estimates the downward trend to continue this year as well. Though we maintain a conservative estimate for PC shipments in the future, we think that with improving macro conditions, increasing demand from emerging economies and the introduction of new ultrabooks, convertibles and touch-enabled designs, the rate of decline in global PC demand will drop in the future.
Intel believes that its upcoming products and platforms can fuel industry demand. In the next few months, it plans to introduce more than 140 core-based ultrabooks, 40+ of which will be touch-enabled. It recently launched its fourth generation core processor family, code-named Haswell. The processor promises to offer improved performance and up to 13 hours of battery life (the biggest improvement in battery life in Intel’s history), in turn enabling a broad new range of ultra-sleek designs across multiple form factors like the 2-in-1 convertibles, tablets and other touch-enabled devices.
Additionally, going forward, we expect to see ultrabook prices reduced to $599 with some models available for even $499 by this year end. On the other hand, touch-enabled Intel-based thin notebooks will be available for as low as $300 and probably below that in the future.  The high price point for Ultrabooks and touch-enabled notebooks designs has been one of the key reasons for lower that expected demand for these products.
Intel Remains A Dominant Player In The Server Market
Historically, strong demand for x86 servers have been the predominant factor fueling global server shipments. x86 servers account for over 80% of total server shipments and their revenue contribution increased from 53.6% in 2007 to 68.2% in 2012. Intel’s server processors are based on the x86 architecture and account for more than 90% of the market.
Intel’s x86 servers are primarily used as a platform for large scale data center buildouts. AMD is the only player that competes with Intel in the x86 server domain, but Intel has a substantial lead over the former in terms of market share based on server shipments. Intel continues to expand its server offering by refreshing its product line across all ranges of performance, performance per watt, and performance per watt per dollar. At IDF Beijing this year, Intel announced its next-generation Atom processor (Avoton) for the microserver segment of the market and its Ivy Bridge product for Xeon cloud servers. Both products will start shipping in the latter part of 2013 and will increase its leadership in the market.
Though the entry of ARM-based players will heat up competition for Intel in the server market, we believe the company will continue to retain its dominance for years to come.
New Products Will Expand Intel’s Presence In Mobile Computing
Over the years Intel has worked towards developing energy efficient chips and its processors now compete with ARM (market leader in the mobile space) designs on performance, and have equal or better power and battery life. The company continues to focus on producing more energy efficient chips and adding features for connectivity and security. It currently powers approximately 12 smartphones and 15 tablets but the number can significantly expand in the future.
Intel recently introduced its Silvermont chip which offer three times better performance or similar level of performance using five times less power compared to the Atom chips. Supporting both the Windows as well as the Atom platforms, Intel believes that Silvermont is one of the biggest chip architecture advances in its history. Its first quad-core Atom SoC (Bay Trail) for tablets and the Merrifield platform for smartphones will be based on the new architecture. Both platforms are on track to start shipping in the second half of 2013.
With Bay Trail, Intel intends to extend its product line across screen sizes and price points in both tablets and PCs. Intel powered tablets could be available for as low as $199 and below in the future. In its earnings call Intel stated that it is gaining market share in tablets and aims to quadruple it tablet volumes in Q3 2013 compared to Q1 2013.  Additionally, it remains on track to ship multimode voice and data LTE baseband solutions by the end of this year, which can expand its foothold in the mobile market.
Leadership In Process Technology
Within the semiconductor industry, Intel is known to have best-in-class R&D capabilities. It is the only chip maker with its own manufacturing, design and fabrication capabilities, which makes it less dependent on other companies. Its manufacturing lead gives it the world’s highest performing, lowest cost and lowest power transistors. 
Intel continues to invest in its manufacturing leadership. In 2012, it ramped up its 22-nanometer factories and shipped its 100 millionth 22 nm processor in Q1 2013, using its revolutionary 3D transistor technology, while its competitors work towards shipping their first unit. Intel is in the process of transitioning to the 14 nm technology and will start production in the latter part of 2013.Notes:
- Intel’s CEO Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 16, 2013 [↩]
- Intel’s Krzanich pledges stronger mobile push in his first speech as CEO, Computer World, May 16, 2013 [↩]
- Intel’s CEO Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, July 17, 2013 [↩]