PC microprocessor manufacturer Intel (
) will report its Q4 2013 and full year earnings on January
16. The persistant decline in PC shipments, combined
with increasing investment in building out its technology, has
impacted Intel's revenue growth as well as its bottom line in the
last two years. Owing to the significant decline in PC shipments,
Intel's top line shrank by 2.5% and 5.1% year over
year in Q1 and Q2 2013, respectively. However, the company
registered 5% sequential growth in Q3 2013 and guided to a modest
increase in its Q4 2013 revenue.
Though Intel expects its 2013 revenue to be flat, it believes
that industry conditions will improve in 2014, as consumers accept
innovative form factors in ultrabooks, convertibles and detachables
and the company expands its presence in the mobile market.
The termination of support for Windows XP in April, in
addition, is expected to increase demand in the corporate market as
well. The year 2013 has been an eventful one for Intel
as it made significant progress in alternative markets with new
platforms, product launches and design wins, which increased its
While we agree that the slowdown in PCs will impact Intel's
short-term growth, we believe that the company has the capability
and technology prowess to re-accelerate growth in the future.
Our price of $29 for Intel
is at a 10% premium to the current market price. We will update our
valuation after the Q4 2013 earnings release.
See our complete analysis for Intel
PC Shipments To Decline For The Second Consecutive Year
The main factors leading to the slump in the PC market include:
1) the cannibalization by tablets and smartphones; 2)
the weak reception for Microsoft's Windows 8 OS; 3) the slowing
enterprise market; 4) consumer softness in mature markets (the U.S.
and Western Europe); and, 5) the slowing demand from emerging
markets. PC sales declined marginally in 2012, and research firm
IDC estimates shipments to decline by 10.1% in 2013, slightly above
its initial forecast of a 9.7% decline. We look forward to the
release of fourth-quarter shipment data by both IDC and Gartner in
However, while overall PC shipments are expected to decline
for the next few years, IDC estimates the portable PC segment to
grow at 8.7% between 2013 - 2017.
Despite its growing focus on the expanding mobile computing
market, Intel continues to derive approximately 70% of its revenue
from the PC market, and thus is highly sensitive to any
adverse development in the industry. Since August 2013, Intel
has introduced over 40 new products for various market segments,
ranging from ultra mobile devices to data centers to the
Internet-of-Things. The company expects an expanding product lineup
to grow its business across a broad range of devices and price
The Bay Trail Platform Can Help Gain Share In Tablets
& Low-Cost PCs:
Based on one of the biggest chip architecture advances in Intel's
history (Silvermont), Bay Trail is the company's
first quad-core Atom SoC. With Bay Trail, Intel intends
to extend its product line across screen sizes and price
points in tablets as well as low-cost PCs. Intel intends to
quadruple the number of tablets with its chips to more than 40
million next year, at price points ranging from below $100 to
$400. Within PCs, it claims to have over
design wins with approximately half of those in 2-in-1 devices.
Haswell To Spur Demand For Higher End PCs:
Intel recently launched its fourth generation core processor
family, code-named Haswell. The processor promises to
offer improved performance, strong graphics and up to 13 hours of
battery life, in turn enabling a broad new range of
ultra-sleek designs across multiple form factors like the 2-in-1
convertibles and other touch-enabled devices.
Merrifield Platform For Smartphone:
At present, Intel has a near zero share in the smartphone market.
Its upcoming Merrifield platform is also based on the Silvermont
platform and is specifically designed to increase the company's
competitiveness in the smartphone market. Additionally, Intel
(which only shipped the single-mode 4G LTE data solution
historically) started shipping multimode voice and data LTE
baseband solutions towards the end of 2013. Despite
intense competition in the market, we think an expanding
mobile portfolio can help Intel increase
its penetration in the smartphone market.
Another Quarter Of Strong Growth In The Data Center
Backed by the launch of Ivy Bridge product for Xeon cloud
servers and Atom-based Avoton SoCs for the microserver segment,
Intel's data center group returned to double digit growth on a
year-over-year basis in Q3 2013. On account of renewed demand from
the traditional enterprise business, along with newer demand from
the white-box server data center market, Intel saw growing
strength across business lines and geographies.
Much of the increase can be attributed to Intel's robust
growth in cloud, storage and high performance computing where
revenues climbed by 40%, 20% and 27%, respectively. The company
expected the year-over-year growth in data center revenue to
accelerate in Q4 2013.
Intel derives over 20% of its revenues and approximately 28% of
its valuation from servers and thus growth in this segment remains
important for its valuation. Intel's server processors are based on
the x86 architecture and account for more than 90% of the
market. Historically, strong demand for x86 servers has
been the predominant factor fueling global server
shipments,especially with the decline in recent quarters of
Unix-based High-end Computing.
Though the entry of ARM-based players could well heat up
competition for Intel in the server market, we believe the company
will continue to retain its dominance for years to come.
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