Accounting for a majority share of the PC microprocessor market,
) performance is highly vulnerable to any adverse development in
the global PC market. While the hard disk drive shortage had
disrupted the PC market last year, the macro headwinds,
cannibalization threat from tablets and the upcoming Windows 8
operating system lunch has further slowed down the PC growth rate
Having cut its 2012 revenue estimate by almost $1 billion last
month, Intel's Q3 2012 earnings of $13.5 billion does not come as
much of a surprise to us. The company reported a net income of $3
billion and generated close to $5.1 billion in cash from operations
in Q3 2012. While the PC group posted a 8% y-o-y decline, the data
center group looked promising with a 6% y-o-y increase.
We believe that the persisting weakness in PC market will impact
the current quarter earnings as well. However, there are certain
catalysts which keep us hopeful of the situation improving
See our complete analysis for Intel
Slowing PC Demand
With $8.6 billion in revenue, Intel's PC client group was
relatively flat sequentially but registered an 8% y-o-y decline.
The decrease was much in line with the global PC shipments, which
marked a negative 8.6% growth in Q3 2012 compared to Q3 2011. Intel
claims that the PC consumption in Q3 grew at half the season rate
and it expects a similar situation next quarter as well.
The slowing enterprise market, consumer softness in mature
markets (US and Westerm Europe), slowing demand growth from
emerging markets and the operating system transitions are some of
the main factors leading to the current slump in PC shipments.
Research firm IDC predicts the global PC market to grow by a mere
0.9% in 2012.
In light of the uncertain macro environment and the upcoming
Windows 8 launch, Intel's customers are maintaining a lean
inventory which in turn led to lower demand for its
microprocessors. Foreseeing the weak demand to persist in the
current quarter, Intel intends to maintain lower factory
utilization rates throughout the quarter and targets reducing its
inventory level by almost $0.5 billion. The company saw its
inventory increase by approx. $400 million in Q3 2012.
Threat Of Cannibalization From Tablets
While the PC market is struggling, tablets are registering a
phenomenal growth with their increasing popularity around the
world. While the above mentioned factors contribute to the slowdown
in PC growth, the threat of cannibalization of PCs by tablets is
also an important factor. Intel feels that it is too early to
quantify the extent to which growth in tablets and smartphones
could impact PC sales as the computing world is in the midst of a
period of creativity and innovation.
Though Intel marked its entry in the lucrative smartphone and
tablet market earlier this year, the company has yet to make a
significant dent in the same. The smartphone and tablet space is
dominated by established ARM based players such as Qualcomm (
) and Nvidia (
However, we feel that Intel has been faring well so far in this
domain. The company launched its new processor code-named Clover
Trail (Atom Z2670) for use in tablets that feature Windows 8 OS,
earlier this month. Additionally, it plans to launch more than 20
atom based tablets from leading OEMs in the current quarter. We
estimate an increase in Intel's market share in this segment by the
end our review period.
Steps To Revive PC Demand
In the coming months, Intel plans to introduce more than 140
core-based Ultrabooks, more than 40 of which will be touch enabled.
Aiming to combine the productivity of a PC with the convenience of
a tablet, Intel intends to launch about a dozen convertible
Ultrabook designs. At the same time the company is also working to
bring down the incremental cost of touch enabled Ultrabooks. Many
of the upcoming Ultrabook designs are slated to hit the mainstream
$699 price point while some could even be below that number.
Along with the Windows 8 launch, we feel that the upcoming
innovative designs and a lower price point could help steer
Ultrabook demand for Intel in the future. However, with the
expected entry of ARM based players in the PC market later this
year, we estimate a marginal decline in Intel's market share by the
end of our forecast period.
We are in the process of updating
our price estimate 0f $31.94 for Intel
for the latest quarter earnings.
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