VALUATION HIGHLIGHTS

1. Client Computing Group constitutes 41% of the Trefis price estimate for Intel's stock.
2. Data Center Group constitutes 36% of the Trefis price estimate for Intel's stock.
3. Internet of Things Group constitutes 10% of the Trefis price estimate for Intel's stock.

WHAT HAS CHANGED?

Q1 2022 Earnings

Intel reported net sales of $18.35 billion for Q1 2022, down from $19.7 billion in Q1 2021. While higher COGS and operating expenses weighed on profitability, $3.5 billion drop in restructuring charges meant that operating income rose from $3.69 billion to $4.34 billion over this period. A $4 billion gain on equity investments outweighed a higher effective tax rate, and EPS more than doubled from $0.83 in Q1 '21 to $1.99 in Q1 '22.

CPU market challenges

In 2020, Apple announced that it was gradually shifting from Intel's chips in their macbooks, to their own range of chipsets. Apple's latest macbook range confirmed this, with most of the new notebooks using Apple's new M1 chipset instead of Intel's i5 and i7 series. Further, Intel announced that its newest generation of chipsets won't come out before late-2022. This could hamper Intel's chipset sales further as its biggest competitor, AMD, has already launched its next generation of chipsets, driving OEMs to shift from Intel to AMD for their chipset needs.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Intel's value that present opportunities for upside or downside to the current Trefis price estimate for Intel:

• Intel has seen strong growth in its Data Center Group over the last few years. The revenues stood at $26 billion in 2021, and we forecast them to grow to over $36 billion by the end of our review period. However, there is a possibility that we are under-estimating the gains from its Xeon Scalable, which has seen strong pick up in demand of late. If Intel can manage to post stronger growth rate, and revenues reach $45 billion towards the end of our forecast period, there will be an upside of over 10-15% in our valuation for the company.

• The Data Center Group EBITDA margins have declined from over 62% in 2014 to around 35% in 2021. While we forecast a strong growth in the margins in the coming years, there is a possibility of margins to improve further, as higher demand for Xeon Scalable can give Intel more control over pricing. If the margins reach back to historical highs of over 62% by the end of our review period, there will be an upside of 15% to our valuation for the company.

For additional details, select a driver above or select a division from the interactive Trefis split for Intel at the top of the page.

BUSINESS SUMMARY

Intel manufactures and markets microprocessors used in servers, desktops and notebooks. Microprocessors are a PC's central processing unit (CPU) or the brain behind the computer. A microprocessor is the single most important component that drives computer's power and performance.

Intel also manufactures chipsets used in desktops, notebooks and wireless devices. A chipset operates as the PC's nervous system, sending data between the microprocessor and input, display and storage devices such as the keyboard, mouse, monitor, hard drive and CD or DVD drive.

SOURCES OF VALUE

Microprocessors and chipsets used in servers, desktops and notebooks are the major sources of revenue for the company.

KEY TRENDS

Market Share Loss To AMD

AMD's Ryzen processors are in high demand of late. Ryzen CPUs have been able to deliver competitive power at a relatively lower cost. As such, AMD has gained some market share from Intel over the past few quarters. AMD is currently working on 7nm chips, which will roll out around the same time with Intel's 10 nm chips. AMD could gain further share in the coming quarters over Intel with its new chips, which it plans to launch for all major products - Ryzen, Radeon, and EPYC processors.

Beyond Ryzen, AMD's growth in the server market is more worrying for Intel. AMD's EPYC processors have been gaining share amid strong performance at a lower price point.

On-Going Server Virtualization

Server virtualization is essentially server consolidation that enables running multiple applications on a single server instead of on multiple servers. Server virtualization is driving a mix shift to higher-end servers, which requires multi-core processor servers that tend to be more complex and more expensive than traditional single core processors.

Increasing Importance of Smartphone and Tablet Chips

While PC shipments have declined drastically in the last few years, mobile shipments (particularly smartphones and tablets) have grown at a robust rate. Though growth rate has slowed as developed markets near saturation, mobile shipments continue to expand at a fast pace.

Convergence of Graphics & Processing

Both Intel and AMD have moved away from the idea of integrated graphics. These chips pack GPU within the CPU leading to much better graphics performance than one can get from traditional integrated graphics.

PC Market Opening up to ARM

New windows versions are ARM-compatible which has opened up the market to ARM-based processor manufacturers. This market was traditionally been dominated by x86 processor architecture. This will challenge the dominance of Intel which could lose some market share in the future, on account of increasing competition.

Growth in The Internet-of-Things (IoT) Market

IoT includes all other computing devices apart from PCs, tablets and smartphones. IoT is still at a nascent stage, but it is expanding fast and is considered to be the next big growth driver in the semiconductor industry, after smartphones and tablets.

According to Cisco Consulting Services, IoT has the potential to unleash $19 trillion of global economic value, by 2024. McKinsey Global Institute estimates that the impact of IoT on the global economy can be as high as $6.2 trillion by 2025.

Intel was a late entrant in the mobile computing space and for this reason does not (yet) have a very large presence in the market. However, the computing giant is keen not to miss the next big wave in computing – Internet-of-things.

In 2014, Intel completed its acquisition of Basis Science, which specializes in wearable device technologies for health and wellness applications. This gives Intel an immediate entry into the wearable devices market. The company intends to build upon this foundation to deliver new products that offer greater utility and value to its customers. Intel has been investing in a wide range of start-ups in the wearables space, and has also tied up with some fashion houses to market wearable gear as a fashion accessory rather than just a device that monitors your health (and more).

In March 2017, Intel entered into a definitive agreement to acquire Mobileye, which offers leading computer vision expertise to create automated driving solutions from the cloud through the network to the car, for nearly $15 billion. The acquisition is expected to position Intel as a leading technology provider in the fast-growing market for highly and fully autonomous vehicles. Automotive is one of the fastest and most promising sub-segments of IoT. Intel estimates the vehicle systems, data, and services market opportunity to be up to $70 billion by 2030. (Link)