Expansion In IoT Can Lead To A 10-20% Upside To Intel’s Valuation

by Trefis Team
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Intel (NASDAQ:INTC) is at the forefront of the Internet-of-Things (IoT), according to a recent report by IoT Analytics. Learning from its relatively late entry into the mobile market  – as a result of which it is still struggling to catch up with Qualcomm – the company entered the IoT space at an early stage, and has been aggressively pushing new products, platforms and partnerships to gain a wide footprint in the market. For over two decades, Intel has been the leader in the PC chip market, accounting for a substantial majority of global microprocessor sales. However, the company’s top line growth has been hit by a slowdown in PC sales over the last few years. Can IoT be the next big thing for Intel, drastically lowering the company’s dependence on the PC market?

Intel currently derives approximately 5% of its revenues from IoT, and we expect the segment to account for approximately 10% of Intel’s total revenue (around $7 billion) by the end of our forecast period.  IoT is considered the next big growth driver in the semiconductor industry, and is expanding at a fast pace. Given the growth opportunities in IoT, there is a possibility that we are underestimating Intel’s growth potential in this market. If this is the case, the revenue contribution from this segment could increase to a much higher level than we currently forecast.

Below is a summary of how our current price and EPS estimate for Intel will change if the IoT revenue contribution increases to more than 10% of Intel’s overall revenue over our review period. You can see the modified model and the resultant impact on key financial estimates here.

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See our complete analysis for Intel

Sizing Up The IoT Opportunity

IoT includes all other computing devices apart from PCs, tablets and smartphones, or as McKinsey puts it, it is the networking of physical objects through the use of embedded sensors, actuators, and other devices that can collect or transmit information about the objects.  Two important factors that have contributed to the growing interconnectedness of objects are: 1) The emergence of the cloud platform, which enables the storage of large amounts of data to be transmitted to and received on wired or wireless devices; and 2) The declining cost of manufacturing semiconductors, which has made it economically feasible to install them on a range of everyday devices that were previously not connected.

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. The installed base for IoT devices is estimated to grow from around 10 billion connected devices today to as many as 30 billion devices (or 50 as per some estimates) by 2020.

Intel’s Aggressive Push In IoT Positions It Well In The Market

Last year, Intel changed its reporting structure and made IoT a standalone segment, underlining its growing focus on the business. The company has seen strong growth in this business in the last few quarters, and we are confident that the momentum will continue in the future as well.

Spending $11 billion in research last year, Intel likely has the biggest R&D budget in the semiconductor industry. Its technology prowess combined with its in-house manufacturing facility gives it an edge over other players in the market. Unlike the mobile market, Intel appears to have entered the IoT space at just the right time (considering it is still at a nascent stage) and is in a strong position to emerge as one of key beneficiaries of the strong growth potential in the market.

In addition to introducing new platforms, the company has launched a number of products and initiatives in the past year with different fashion, fitness and lifestyle brands, to accelerate its presence in wearables. Intel also has a reference platform which makes it easier for customers to implement their own IoT solutions and deliver innovations to market faster. Earlier this month, Intel announced a new IoT Platform reference architecture and new hardware and software products as part of its effort to build out one of the most comprehensive IoT offerings. The platform includes two reference architectures and a portfolio of products, including new Quark processors for IoT, free and simple operating systems with a comprehensive cloud suite from Wind River, and analytics capabilities. Accenture, Booz Allen Hamilton, Capgemini, Dell, HCL, NTT DATA, SAP, Tata Consultancy Services Ltd., Wipro, Levis, Honeywell and many others are collaborating with Intel to develop and deploy solutions using their building blocks on the Intel IoT Platform.

The data generated from billions of connected IoT devices will need to be processed and analyzed, which will require greater computing and storage capacity. Being the market leader in the server microprocessor market, Intel is also well-positioned to gain from the explosion of data that IoT will bring about.

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