Scenarios That Can Change Our Valuation For Intel
Intel (NYSE:INTC) primarily manufactures and markets microprocessors used in servers, desktops and notebooks. The company is the inventor of x86 architecture of microprocessors, which is used in most of the personal computers today. Intel commands approximately 99% of the market share in the server processor market too. Plagued by a slowdown in the personal computers market, the company is investing heavily in the IoT market. Research firm IoT Analytics, recently placed Intel among the top four IoT companies leading the development in the semiconductor industry. Below we discuss key scenarios related to the server platform and the IoT segment of the company that present upside or downside opportunities to our current price estimate for the company:
- IoT becomes a bigger part of Intel’s business: Having missed out on the mobile revolution, Intel is determined to be an early entrant in the Internet-of-Things (IoT) market, which is considered to be the next big wave in computing. In 2014, the company changed its reporting structure and made IoT a stand-alone segment, underlining its growing focus on the business. Intel currently derives approximately 4% of its revenue from IoT and we expect the segment will account for approximately 11% of Intel’s total revenue by 2023. However, if Intel’s IoT revenue increases to $20 billion by the end of our review period (versus our current estimate of $7 billion), there will be a more than 10% upside to our price estimate.
- Steeper decline in Intel’s server market share: Having lost market share to AMD several years back, Intel has steadily regained its share in the server processor market, with its market share increasing from 85% in 2007 to 99% at present. Intel’s data center business continues to see robust growth as a result of the build-out of the cloud, data analytics and a strong product portfolio. However, if AMD manages to accelerate its progress in the server processor market and its collaboration with ARM helps the company increase its market share to historical levels, it can have a considerable impact on Intel’s valuation. If Intel’s server market share declines to as low as 50% (as compared to our current estimate of 95%) over our review period, it will lead to an approximate 20% decline in our price estimate.
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