How Sensitive Is Intel To Its EBITDA Margin Change?

by Trefis Team
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We estimate that Intel‘s (NASDAQ:INTC) EBITDA will likely grow in low-mid single digits in 2018, primarily led by its Data Center Group, which has seen solid growth of late, led by its cloud business, as well as high performance products, such as Xeon Scalable. We have created an interactive dashboard analysis on Intel’s sensitivity to changes in its EBITDA margin. Note that you can adjust the margin drivers, and see the impact on Intel’s overall valuation and price estimate. Below are some of the charts and data from the interactive dashboard.

Expect Data Center Group To Lead Future EBITDA Growth

We forecast Intel’s EBITDA margin separately for its Client Computing Group, Data Center Group, Internet of Things, and All Other segments. Client Computing Group EBITDA margin declined from over 42% in 2012 to 35% in 2016, due to increasing competition, macro headwinds, and negative margins from the Mobile and Communication division. Also, Intel was heavily subsidizing manufacturers’ costs to include its components in their future tablets, a move that significantly impacted its bottom line. However, the company managed to grow its margins to 44% in 2017, due to an increase in average selling prices, and an improved product mix. We expect the segment margins to stabilize around 42% in the long run. The segment revenues have also improved in recent years due to better pricing. In fact, 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. With stable margins of around 42%, the segment EBITDA will likely grow in low single digits.
Looking at the Data Center Group, the segment margins have declined from over 62% in 2014 to 46% in 2016, due to higher expenses. However, the margins improved slightly to 50% in 2017, led by new improved process technology and higher average selling prices. We expect the margins to remain around current levels of 50% in the coming years, and any significant increase is unlikely. The segment revenues are expected to trend higher in the coming years. 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 2018. As such, we forecast the segment EBITDA to grow at around 7% over the next couple of years.
Among other segments, Internet of Things EBITDA margin has declined from the highs of over 41% in 2013 to a little over 26% in 2017. The large range of devices in this category pitches Intel against a lot of competing chip makers such as Qualcomm, Broadcom, Nvidia, Texas Instruments, ST Microelectronics etc. Intense competition in the market has an impact the company’s pricing power. However, we expect the company to maintain the current margins of 26%. It should be noted that the average annual segment revenues have grown in the low teens over the past five years, and we expect the growth to accelerate in the coming years. As such, higher volumes will help reduce fixed costs and hence help Intel sustain the current margins.

 

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