Data Center Group Will Likely Drive Intel’s Near Term Growth

Intel (NASDAQ:INTC) has seen solid growth in the recent quarters, primarily led by its Data Center Group. The segment is benefiting from its cloud business, as well as high performance products, such as Xeon Scalable. While Intel continues to be dominant in the semiconductor industry, controlling over 90% of the data center market and nearly 80% of the consumer PC market, the landscape has started changing with Nvidia making strong inroads in the server market and AMD challenging Intel with its new Ryzen and EPYC processors. Having said that, the server market is slow to change unlike the consumer market, and Intel will continue to command a giant share in the foreseeable future, in our view. We have created an interactive dashboard analysis which you can use to arrive at your own price estimate for the company by modifying the various drivers.

Expect Data Center Group To Lead Growth

Data Center Group will benefit from the growth in cloud computing, which will result in greater sales of bigger, faster, and higher-end servers at the expense of cheaper ones. However, this can potentially slow down future upgrades and ultimately lead to a moderate growth in total shipments. The cloud computing market is expected to grow from $220 billion in 2016 to over $411 billion by 2020, according to Gartner. Intel, in particular, will benefit from server virtualization. The company reported a 24% segment revenue growth and over 70% jump in operating income in Q1. We currently forecast segment revenue growth to be in the high single digits for the full year.

Intel’s Client Computing Group accounts for more than 50% of the company’s total revenues. While the business faced headwinds in 2015 due to the weakness in the overall PC market, it has recovered over the last couple of years, led by better pricing. The segment revenues were up 3% in Q1, despite a continued decline in the PC TAM (total available market). We expect the segment to continue to grow in the low single digits throughout our forecast period. This can be attributed to demand from emerging markets and launch of new form factors, which will likely help sustain notebook shipments. Also, the company recently launched its 8th Gen Intel Core i9 processor for mobile. Overall, we believe that Intel is poised for another solid year, as far as revenue growth is concerned. However, we expect that EPS growth is likely to slow down somewhat, as there will be significantly less room for further margin improvement. Our $53 price estimate for Intel is based on $3.70 expected EPS in 2018 and a price to earnings multiple of a little over 14. Our estimates are slightly below the average consensus on the street. Our price estimate of $53 for Intel is slightly below the current market price.

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