PC microprocessor manufacturer Intel (NASDAQ:INTC) will report its Q4 2013 and full year earnings on January 16. The persistant decline in PC shipments, combined with increasing investment in building out its technology, has impacted Intel’s revenue growth as well as its bottom line in the last two years. Owing to the significant decline in PC shipments, Intel’s top line shrank by 2.5% and 5.1% year over year in Q1 and Q2 2013, respectively. However, the company registered 5% sequential growth in Q3 2013 and guided to a modest increase in its Q4 2013 revenue.
Though Intel expects its 2013 revenue to be flat, it believes that industry conditions will improve in 2014, as consumers accept innovative form factors in ultrabooks, convertibles and detachables and the company expands its presence in the mobile market. The termination of support for Windows XP in April, in addition, is expected to increase demand in the corporate market as well. The year 2013 has been an eventful one for Intel as it made significant progress in alternative markets with new platforms, product launches and design wins, which increased its competitiveness.
While we agree that the slowdown in PCs will impact Intel’s short-term growth, we believe that the company has the capability and technology prowess to re-accelerate growth in the future. Our price of $29 for Intel is at a 10% premium to the current market price. We will update our valuation after the Q4 2013 earnings release.
PC Shipments To Decline For The Second Consecutive Year In 2013
The main factors leading to the slump in the PC market include: 1) the cannibalization by tablets and smartphones; 2) the weak reception for Microsoft’s Windows 8 OS; 3) the slowing enterprise market; 4) consumer softness in mature markets (the U.S. and Western Europe); and, 5) the slowing demand from emerging markets. PC sales declined marginally in 2012, and research firm IDC estimates shipments to decline by 10.1% in 2013, slightly above its initial forecast of a 9.7% decline.  We look forward to the release of fourth-quarter shipment data by both IDC and Gartner in coming days.
However, while overall PC shipments are expected to decline for the next few years, IDC estimates the portable PC segment to grow at 8.7% between 2013 – 2017.
Despite its growing focus on the expanding mobile computing market, Intel continues to derive approximately 70% of its revenue from the PC market, and thus is highly sensitive to any adverse development in the industry. Since August 2013, Intel has introduced over 40 new products for various market segments, ranging from ultra mobile devices to data centers to the Internet-of-Things. The company expects an expanding product lineup to grow its business across a broad range of devices and price points.
– The Bay Trail Platform Can Help Gain Share In Tablets & Low-Cost PCs: Based on one of the biggest chip architecture advances in Intel’s history (Silvermont), Bay Trail is the company’s first quad-core Atom SoC. With Bay Trail, Intel intends to extend its product line across screen sizes and price points in tablets as well as low-cost PCs. Intel intends to quadruple the number of tablets with its chips to more than 40 million next year, at price points ranging from below $100 to $400.  Within PCs, it claims to have over 50 design wins with approximately half of those in 2-in-1 devices.
– Haswell To Spur Demand For Higher End PCs: Intel recently launched its fourth generation core processor family, code-named Haswell. The processor promises to offer improved performance, strong graphics and up to 13 hours of battery life, in turn enabling a broad new range of ultra-sleek designs across multiple form factors like the 2-in-1 convertibles and other touch-enabled devices.
– Merrifield Platform For Smartphone: At present, Intel has a near zero share in the smartphone market. Its upcoming Merrifield platform is also based on the Silvermont platform and is specifically designed to increase the company’s competitiveness in the smartphone market. Additionally, Intel (which only shipped the single-mode 4G LTE data solution historically) started shipping multimode voice and data LTE baseband solutions towards the end of 2013. Despite intense competition in the market, we think an expanding mobile portfolio can help Intel increase its penetration in the smartphone market.
Another Quarter Of Strong Growth In The Data Center Group
Backed by the launch of Ivy Bridge product for Xeon cloud servers and Atom-based Avoton SoCs for the microserver segment, Intel’s data center group returned to double digit growth on a year-over-year basis in Q3 2013. On account of renewed demand from the traditional enterprise business, along with newer demand from the white-box server data center market, Intel saw growing strength across business lines and geographies.
Much of the increase can be attributed to Intel’s robust growth in cloud, storage and high performance computing where revenues climbed by 40%, 20% and 27%, respectively. The company expected the year-over-year growth in data center revenue to accelerate in Q4 2013.
Intel derives over 20% of its revenues and approximately 28% of its valuation from servers and thus growth in this segment remains important for its valuation. Intel’s server processors are based on the x86 architecture and account for more than 90% of the market. Historically, strong demand for x86 servers has been the predominant factor fueling global server shipments,especially with the decline in recent quarters of Unix-based High-end Computing.
Though the entry of ARM-based players could well heat up competition for Intel in the server market, we believe the company will continue to retain its dominance for years to come.Notes:
- IDC Forecasts PC Shipments to ……….With No Significant Recovery, IDC Press Release, December 2, 2013 [↩]
- Intel CEO says contract manufacturing business to expand, WTAQ, November 21, 2013 [↩]