Intel supported by new chips, new markets
Growth in PC shipments in emerging markets and pricing support from chip innovation should help the tech company.
This year will likely be another eventful one for the company as it innovates further, pushes ahead in the mobile market and fights greater competition. Although it may not be as stellar as 2011, we believe that Intel has the capacity to do well this year despite certain threats, and the stock has potential to gain another 10% to 15% based on its fair value. Intel already made big strides in terms of innovation when it launched Sandy Bridge APUs in 2011, making integrated graphics from other players like Nvidia (NVDA) obsolete.
Our price estimate for Intel stands at $30.37, implying a premium of more than 10% to market price. We stay positive as we believe that the pricing support from chip innovation and growth in PC shipments in emerging markets will help.
Although the impact of floods in Thailand is likely to weigh on the first half of 2012, we believe that overall PC shipments will grow compared to 2011. This will be driven by increasing demand in emerging markets, which have witnessed double-digit growth for Intel. About 350 million PCs are sold globally, including notebooks, desktops and netbooks.
The growth is going to come from notebooks, and given that countries like India and China have a combined population of over 2 billion, there is a potential for the PC market to expand. Even if we assume that only 20% can afford PCs, that alone translates into 400 million potential buyers in these two countries. China has already become the world's biggest PC market and unless tablets can grab a large chunk of these incremental buyers, PC shipments will continue to grow.
Intel's launch of Sandy Bridge chips in 2011 led to a substantial increase in average selling prices for Intel's microprocessors. Intel will continue with such innovation and may even accelerate it as ARM-based players enter the market. The company is setting up a factory for manufacturing chips based on 14nm process technology that will help it save costs in the long run and make money.
The company is also launching its next-generation Ivy Bridge processor that will provide 70% more graphics performance than Sandy Bridge. These innovations will help Intel fight some of the pricing pressure it will see due to increased competition. Although we forecast declines, these declines are moderated by the pricing support from innovation. Moreover, the company has been experiencing a better microprocessor mix that has helped in growth in average processor selling price.
The threats to Intel are the entry of ARM-based players in the PC microprocessor market and the potential cannibalization of PC sales by tablets leading to a slowdown or even a decline.
The entry of more players in the PC microprocessor market will not only lead to a loss of share for Intel but also to pricing competition that could play a role in shrinking Intel's profits. We already incorporate these two factors in our forecasts, but the intensity to which they take effect will determine whether or not our price estimates are too optimistic.
In addition, risk exists from potential cannibalization of PC sales by tablets. If emerging markets can not make up for it, then there could be a downside to Intel's price estimate. As PC sales suffer, the pricing will suffer as well, thus exacerbating the effect. The combined downside resulting from competition and cannibalization could be of the order of 15%.
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