Dominating the PC microprocessor market for the past two decades, Intel’s growth has slowed down in the last two years on account of weakness in the global PC market. In 2012, the company reported a 1.2% and 15% decline in annual revenue and net income, respectively. As PC shipments continued to decline drastically in the first half of 2013, 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 estimates a modest increase in its Q4 2013 revenue.
The year 2013 has been an eventful one for Intel as it made significant progress in alternate markets with new platforms, product launches and design wins, which increased the company’s competitiveness. Though Intel expects its 2013 revenue to be flat, it believes that the macro situation will improve in 2014 as the industry accepts innovative form factors in ultrabooks, convertibles and detachables and the company expands its presence in the mobile market.
Our current price of $29 for Intel is at a 10% premium to the current market price. 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.
Since August this year, 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 points. Below are some platforms introduced by the company in 2013 that can help accelerate its future demand:
1. The Bay Trail Platform: 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. Within PCs, it claims to have over 50 design wins with approximately half of those in 2-in-1 devices. Bay Trail can also help Intel increase its presence in the low-cost PC segment, an area historically dominated by AMD.
Intel’s earlier Atom SoC based on Clover Trail and Clover Trail+ platforms were present in a relatively small number of tablets. Backed by some recent high profile design wins such as the Samsung Galaxy Tab, the company now accounts for 4%-5% of the global tablet market.
2. Haswell: Haswell is Intel’s fourth generation core processor, which promises to offer improved performance, strong graphics and up to 13 hours of battery life. This, in turn, will enable a broad new range of ultra-sleek designs across multiple form factors like the 2-in-1 convertibles and other touch-enabled devices.
Intel claims that around 70% of today’s Ultrabooks are touch enabled and expects the number to reach 100% by the end of 2013. The 2-in-1 devices can help spur demand for Intel processors as they offer customers the benefits of a PC and convenience of a tablet. Around 60 designs ranging between $299 and $999 are expected to hit the market in the near future. The extension of product lineup across devices, price points and operating systems positions Intel to expand its business across a broad range of compute devices.
While Intel has been the world’s dominant PC Microprocessor maker for over two decades, it has had difficulty penetrating newer processor markets for tablets and smartphones, in which Qualcomm and Samsung (PINK:SSNLF,) are dominant. However, Intel remains focused on expanding its presence in the mobile computing space and is no longer dependent solely on PCs. In Q3 2013, it derived 62% of its revenue from the PC market as compared to 70% in 2012.
Intel marked its most recent thrust in the mobile market in 2011 with the acquisition of Infineon’s Wireless Solutions Business. This gave it a near top ranking in the market for cellular baseband processors, even as Qualcomm and Samsung attained their dominance through Apple and Android. With considerable investment and effort, it has built on this and its Atom-based SOCs now power around 12 smartphones and 15 tablets at present. The company plans to significantly increase its investment in chips for the fast-growing mobile market and lower investment in its core PC processor business.
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. Intel’s Bay Trail platform (mentioned above) can help the company gain share in the tablet market.
At present, Intel has a near zero share in the smartphone market. Its upcoming Merrifield platform, based on the Silvermont platform, 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 stiff competition in the mobile computing space, we believe that LTE integration will enable Intel to make a deeper foray in the smartphone market.
Expanding The Contract Manufacturing Business
At its 2013 analyst conference, Intel’s CEO Brian Krzanich announced that he plans to expand the company’s Foundry (i.e., contract manufacturing) business by allowing more chip designers to tap into the world’s most advanced process technology. Intel is way ahead of competition in developing the 14 nm and 10 nm manufacturing technologies.
The Foundry business currently serves small vendors and does not contribute much to Intel’s revenue, but this can change if the company opens up its factories to high-volume clients making mobile processors. Intel plans to allow mobile processor manufacturers to use it as a foundry or contract manufacturer to make their own chips. We believe the move can accelerate Intel’s growth in mobile computing as the company still lags behind leading smartphone and tablet chipmakers.