Intel Overview: What’s Driving Its $33 Valuation

Intel (NASDAQ:INTC) is a leading semiconductor company that designs and manufacturers microprocessors used in desktops, notebooks and servers. Accounting for a substantial majority, Intel has been dominating the PC microprocessor market for the last two decades. Even in the tough macro environment, the company gained a record market share of 16.5% in 2011 and retained its top position in the semiconductor industry. ^[1]

In light of the challenging macro conditions, while the PC market growth rate has slowed, tablets and smartphones sales are witnessing tremendous growth which is expected to increase in the future. Determined to be the front-runner in the global technology revolution and focused to stay abreast of changing consumer preferences, Intel marked its entry in the lucrative smartphone and tablet markets in 2012. However, despite its increasing efforts, Intel has yet to make a significant mark in the mobile computing domain.

Here we provide a quick snapshot of how Intel makes money, the important segments that contribute to its business, and the key trends that could impact its valuation.

See our complete analysis for Intel

What are the key markets and customers for Intel? What are the most important segments that contribute to its growth?

Intel’s business can be broken down into the following key segments:

1. PCs – Intel manufactures and markets microprocessors and chipsets used in notebooks and desktops. Microprocessors are a PC’s central processing unit (CPU) which drives its power and performance. A chipset is the PC’s ‘nervous system’, sending data between the microprocessor and input, display, and storage devices such as keyboard, mouse, monitor, etc. Intel sells its processors to original equipment manufacturers (OEMs) and original design manufacturers (ODMs) such as Hewlett-Packard, Dell, Toshiba and Sony, and individuals building custom PCs.

Out of $51 billion in revenue that Intel earned in 2011, 70% was accounted for by the PC market. The $35 million in revenue from PCs can be further split into $18 billion, $10 billion and $7 billion from sale of notebook processors, desktop processors and PC chipsets, respectively.

Intel earned 55% operating profit from the PC segment in 2011, which is constant across all the above sub-segments. With the increase in competition, we expect margins to decline slightly in the future.

Intel currently accounts for over 80% and 70% of the notebook and desktop processor markets, respectively. However, we forecast a marginal decline in the company’s share in both markets in the future as a number of ARM-based players are expected to enter the PC microprocessor market in 2013. Additionally, the increasing demand for lower-priced PCs from emerging markets could work against Intel as its processors are priced at a considerable premium over competitors.

2. Servers – With over 90% market share, Intel also leads the market for server microprocessors. Servers manage large amounts of data, direct data traffic, perform complex transactions, and control central functions in local and wide area networks and on the Internet. With the rapid increase in online data processing, the server market is a fast growing division. Intel sells its processors directly to server manufacturers such as IBM, Dell, HP, etc.

Intel earns close to 20% of its revenue from the server market and makes around 64% operating profit on the same, the highest among all its business segments. While we believe that Intel will remain the leader in server processors for years to come, we feel that its market share could decline marginally in the future as AMD’s server processors become more competitive with the SeaMicro acquisition. Additionally, the entry of ARM-based players in the server market will intensify competition for both Intel and AMD.

3. Atom Processors – Atom is the brand name of Intel’s ultra-low voltage microprocessors, which was introduced initially to power netbooks, nettops and other mobile internet devices (MIDs). The processors are now increasingly being considered for other devices such as smartphones and tablets. We estimate Intel to currently account for 7% of the total available market, which includes netbooks, smartphones, tablets, car infotainment systems, smart TVs, etc.

Only 2.4% of Intel’s revenue in 2011 was derived from Atom processors and the company earned only 2% operating profit on the same. Smartphone and tablets are the fastest growing segments in the semiconductor industry. Intel has bagged a number of designs in 2012 and claims to have another 20 upcoming tablet designs in 2013, which can increase its market share.

In addition to technology advancement, we feel a higher revenue stream for a similar cost base could improve margins in the future.

4. Embedded & Others – Intel manufactures microprocessors and chipsets used in a variety of industries such as industrial and medical. The company also manufactures products for use in digital consumer devices such as digital TV, high-definition media players, cable modems and set-top boxes.

In 2011, embedded markets accounted for 7.5% of Intel’s revenue and the company earned 2% operating profit on the same. Going forward, we expect both revenue and margins to increase at a steady rate for the rest of our forecast period.

Factors that can revive Intel’s PC demand

The slowing enterprise market, consumer softness in mature markets (US and Western Europe), slowing demand growth from emerging markets, operating system transitions and cannibalization by tablets are some of the main factors leading to the current slump in PC shipments. Research firm IDC predicts the global PC market to grow by a mere 0.9% in 2012. ^[2]

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. At the same time, the company is also working to bring down the incremental cost of touch-enabled Ultrabooks. Many of the upcoming Ultrabook designs are slated to hit the mainstream $699 price point while some could even be below that number.

We feel the upcoming innovative designs and a lower price point could help steer Ultrabook demand for Intel in the future.

Increasing share in the smartphone & tablets market

The smartphone and tablet space is dominated by established ARM-based players such as Qualcomm (NASDAQ:QCOM) and Nvidia (NASDAQ:NVDA) which together account for the majority of the mobile computing market and have a number of high profile design wins in their portfolio. (Read Our Article: How Big A Threat Can Intel Be To ARM’s Mobile Dominance?)

However, we feel that Intel has been faring well so far in this domain and claims to have a strong road-map for the future. It recently launched its new processor code-named Clover Trail (Atom Z2670) for use in tablets that feature Windows 8 OS. Additionally, it plans to launch more than 20 Atom-based tablets from leading OEMs in the current quarter. Intel’s upcoming Atom Z2580 promises to offer a better performance, battery life and experience over its predecessors.

We estimate an increase in Intel’s market share in this segment by the end our review period.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Intel grabs record share of growing chip market, Computer World, April 17, 2012 [↩]
2. IDC Lowers PC Outlook As Shipments Decline In Second Quarter Ahead Of Fall Product Updates, IDC Press Release, August 23, 2012 [↩]