Here’s What Will Drive Intel’s Near Term Earnings Growth

by Trefis Team
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Intel (NASDAQ:INTC) is seeing strong growth in its Data Center business, and we expect it to drive the company’s near term earnings growth. The strong demand for high performance products, such as Xeon Scalable, has aided the segment growth in the recent past, and we expect this trend to continue in the near term. Apart from the Data Center Group, the company’s Client Computing Group will also aid the overall earnings growth, led by modest growth in the overall PC TAM (total available market). We have created an interactive dashboard ~ What Will Drive Intel’s Near Term Earnings Growth. You can adjust the revenue and margin drivers to see the impact on the company’s overall earnings, and price estimate.

Expect Data Center Group To Drive Near Term Growth

We forecast the Data Center Group revenues to grow in low 20s percent for the full year 2018. The segment is benefiting from its cloud business, as well as high performance products, primarily Xeon Scalable. The company is seeing growth in all verticals, Cloud, Enterprise & Government, and Communications. Cloud, in particular, is seeing strong growth and saw a 50% jump in Q3 revenues. The overall public cloud computing market is expected to grow in the low 20s percent to $186 billion in 2018, according to a research by Gartner. Growth in cloud computing will result in higher demand for faster and high performance servers, and this will bode well for Intel. While Intel’s market share in data center servers is in the high nineties percent, AMD is trying to increase its market share with its EPYC processors (Also see ~ Expect Ryzen And EPYC To Drive AMD’s Future Earnings Growth). Given the overall growth in the cloud computing, Intel’s Data Center Group will continue to see strong growth in the near term, in our view. Also, we expect a slight uptick in EBITDA margins, led by higher ASPs for its products.

Client Computing Group Will Aid The Overall Earnings Growth

We forecast the Client Computing Group to see mid-high single digit revenue growth for the full year 2018, primarily led by higher notebook sales, given an expected modest growth in the overall PC TAM, after 7 years of decline. Notebook sales have picked up in the recent past, and the global shipments were up 2% in 2017. In fact, Intel saw low double digit growth in notebook sales in Q3. However, we don’t expect any significant revenue growth for the segment in the coming years, given the overall computing devices market is expected to remain relatively stable. The notebook market, in particular, is expected to grow at a CAGR of 0.4% to $109 billion by 2025. Moreover, Intel is facing competition with AMD, which is seeing a sharp surge in sales, led by the success of its Ryzen processors. More OEMs (original equipment manufacturers) are shipping Ryzen processor-based notebooks.
Overall, we expect the Data Center Group to drive the company’s near term earnings growth, led by Xeon Scalable. We currently forecast earnings of $4.56 per share in 2018, and a TTM price to earnings multiple of 13x, to arrive at our price estimate of $58 for Intel, which is at a premium of around 20% to the current market price.

 

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