Intel’s Market Leadership And Growth Potential Support A $28 Fair Value

Dominating the PC microprocessor market for the last two decades, Intel’s (NASDAQ:INTC) growth rate has slowed on account of persistent weakness in the global PC market. The company closed its fiscal 2012 with 1.2% and 15% declines in annual revenue and net income respectively. Though the downward trend continued in Q1 2013 with Intel witnessing a 3% decrease in sales, we think the company managed to hold its ground well in the light of drastic decline in global PC shipments in the quarter (13.9% y-o-y). (Read: Intel Holds Its Ground Despite Dismal PC Sales)

With more than 80% and 90% share in the PC and server microprocessor markets respectively, Intel has a near monopoly in these two markets. However, the company considerably lags leading ARM-technology based players such as Qualcomm (NASDAQ: QCOM) in the mobile processor market, which is the fastest growing segment in the semiconductor industry.

Intel has made good progress in alternate markets with new product launches and design wins last year. Being more responsive to customer demands in the mobile computing segment is one of the key growth strategies of its newly appointed CEO Brian Krzanich. For 2013, Intel has a robust pipeline of new platforms and products, which we feel will help increase its competitiveness in the market.

Intel’s stock has increased by more than 20% in the last six month. While its short term growth might suffer from the PC slowdown and a small footprint in the mobile computing market, we believe the company has strong fundamentals to support a higher valuation. In this article, we discuss certain key developments that reiterate our belief in Intel’s long term growth potential.

See our complete analysis for Intel

Ultrabook Improvement & New Designs Will Spur Demand

Despite introducing a $300 million fund for its development and promotion last year, Intel’s ultrabooks failed to garner the expected response. While research firm IHS iSuppli initially estimated a total of 22 million ultrabooks to be shipped in 2012, it cut its forecast to just 10.3 million towards the end of the year. ^[1]

The high price point has been one of the key reasons for the lower that expected demand for ultrabooks. In its Q1 2013 earnings call, Intel announced that ultrabook prices will decline to $599 with some models available for even $499 by this year end. Additionally, early next month, Intel will launch its fourth generation core processor family, code-named Haswell. The processor promises to offer improved performance and up to 13 hours of battery life, in turn enabling a broad new range of ultra-sleek designs across multiple form factors. Intel claims that that touch-enabled Intel-based thin notebooks will be available for as low as $300 and probably below that in the future. ^[2]

We believe that lower price points, touch screen features and more convertibles and detachable designs will help spur ultrabook demand in the future. IHS estimates ultrabook shipments to reach 95 million by 2016, accounting for almost one-third of the global laptop market. ^[1]

Stronger Mobile Push With The Overhaul Of Atom Processors

Earlier this month, Intel’s outgoing CEO Paul Otellini admitted that refusing a chance to supply chips for Apple’s first iPhone six years back was perhaps his biggest mistake. ^[3] Intel marked its entry in the mobile market at the start of 2012, and its Atom processors power only 12 smartphones and 15 tablets at present, whereas ARM Holdings accounts for close to 90% of the market. ((Intel’s Krzanich pledges stronger mobile push in his first speech as CEO, Computer World, May 16, 2013))

Nevertheless, the company has made good progress in mobile computing in the last year. As Intel’s processor in general consumed more power, they were not considered suitable for use in mobile devices. However, it has worked towards developing more energy efficient chips and its processors now compete with ARM designs on performance, and have equal or better power and battery life. Intel continues to focus on producing more energy efficient chips and adding features for connectivity and security.

Earlier this month, Intel introduced its new Silvermont chip which promises to offer three times more performance or similar level of performance using five times less power compared to the Atom chips. Intel believes that Silvermont is one of the biggest chip architecture advances in its history. Intel’s first quad-core Atom SoC (Bay Trail) for tablets and the Merrifield platform for smartphones will be based on the new architecture. Both platforms will start shipping in the second half of 2013.

Intel recently introduced one of the industry’s smallest and lowest-power multimode-multiband LTE solutions (XMM 7160) that supports smartphones, tablets and ultrabooks. It currently ships the single-mode 4G LTE data solution, and remains on track to ship multimode voice and data LTE baseband solutions by the end of this year. Despite increasing competition, we believe that an expanding mobile portfolio will help Intel increase its penetration in the smartphone and tablet market.

Intel’s Technology Leadership Places It Ahead Of Competition

Within the semiconductor industry, Intel is known to have huge 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. It is also the only company to design chips in the 22nm node while even its closest competitors are still producing chips on the 28 nm node. Last year, Intel pumped in $4.1 billion into ASML Holdings (NASDAQ:ASML), to fund the next generation chipmaking technology.

Intel continues to invest in its manufacturing leadership. In 2012, it ramped up its 22-nm factories and intends to start production on the 14-nm process early next year. Intel purchased $11 billion in capital assets and invested more than $10 billion in R&D in 2012, the highest in the industry.

In addition to the above developments, Intel’s data center group also underwent a comprehensive renewal across its product line, which we feel will contribute to higher revenue from this segment in the future. The semiconductor industry is undergoing a period of transition and innovation. With a robust portfolio of new platforms and products, we feel Intel is well positioned to leverage growth across the wide range of devices, from low power portable devices to powerful data centers.

Our $27.58 price estimate for Intel is at a premium of over 10% to the current market price.

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

1. Why Ultrabooks are falling well short of Intel’s targets, PC Pro, October 2, 2012 [↩] [↩]
2. Intel’s CEO Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 16, 2013 [↩]
3. Outgoing Intel-CEO has just one regret: Missing out on the iphone, Neowin.net, May 17, 2013 [↩]