Is It The Perfect Time To Buy Intel?

Apr.15.13 | About: Intel Corporation (INTC)

Intel's (NASDAQ:INTC) first quarter of 2013 earnings report is Tuesday and it is shaping up to be a weak quarter for this chip making giant. On Friday the research firm International Data Corporation (IDC) reported the global PC market is seeing a major decline in shipments. IDC shows a 14% decline in shipments for the first quarter of 2013 over the shipments for the first quarter of 2012. This decline is almost twice as fast as IDC predicted for this quarter, which was estimated as a decline of 7.7%. Intel still earns over 60% of its revenues from PCs so this sharper-than-expected decline could hurt the top and bottom line for the first quarter. This short-term weakness may very well be a great opportunity to purchase shares of Intel at what I expect to be the bottom or near bottom for the stock price.

The stock price for Intel slipped to $21.65 a share. The decline of the PC market is not new news for the market but the sharpness of the decline is. I would assume the expectation for the PC shipments to decline is mostly already incorporated into the share price for Intel. But I think there could be additional downward pressure on the stock price once the earnings are released. Analysts are expecting Intel to report sales in the lower end of the spectrum of Intel's guidance. This is going to be important to Intel this quarter. The market already has a poor outlook on Intel's future business opportunities as evidenced by the low P/E multiple of 10.18. The 5-year average for the P/E of Intel is 16.6 so the current multiple is approximately 38% lower than the 5-year average. In my mind this sets the stage for an overreaction to a negative surprise on either the earnings or the revenues for Intel. I personally am very bullish on Intel and expect once Intel starts proving to the market it can compete in the mobile market it will begin to earn a P/E multiple expansion. But the point now is this weak quarter might be the perfect time to enter a position or add to a position in Intel.

The 14% decline of the PC market from last year's shipments for the 1st quarter could cost Intel a little over $1 billion in revenue for the quarter. Server sales were up in the 4th quarter for the server market with most of that gain coming from sales of systems based on the Sandy Bridge processor, excellent for Intel. The expectation is for the server market to continue to expand as the need for Density Optimized Servers continues to grow as we connect more and more internet capable devices to networks. The 5% growth in the sever market helps cover the damage caused by the slowdown in PC sales but not completely leaving a reduction of approximately $1 billion in revenue. Approximately 20% of Intel's revenues are garnered from the server market and as the mobile explosion continues the need for servers should accelerate to provide cloud computing power and storage for those devices. Intel's 90% market share in the server market means it will derive the majority of the benefit from the expansion of this market.

The IDC has adjusted its previous forecast to a decline of almost 10% for PC shipments for the second quarter but expected PC growth in the low single digits for the year. Based on the revisions so far I think it would be safe to expect flat growth in PCs for the year. The bright spot in my opinion, for the PC market is the convertibles and ultrabooks that are hitting the shelves this quarter. I started seeing commercials for Dell (NASDAQ:DELL) convertibles featuring "Intel Inside." I also have seen Microsoft (NASDAQ:MSFT) commercials for convertibles as well. Intel is also actively engaged in reducing the costs of the touch technology for these convertibles, which is believed to be one of the significant issues with its main-stream adoption. The disappointment with the Windows 8 operating system is also seen by analysts to be holding back the PC market. I believe this impression of the Windows 8 system is beginning to turn around. Mr. Eassa did some research on the reviews of the new Windows 8 ultrabook and has found universally high satisfaction from users. I believe these products will begin to slow the declines in PC sales for the next couple quarters.

The second quarter with its expected 10% decline in PC sales will impact Intel but I believe the impact will be lessened be increases in Intel's presence in the mobile markets, and stronger adoption of Windows 8. The new mobile products based on the Clovertail+ chipset will increase Intel's market share in both tablets and smartphone markets. Intel claims to have 20 tablet designs coming out in 2013. I expect the majority of those to debut in the fourth quarter and be based on the new Bay Trail CPU but several will hit the shelves in the second quarter. While these increases in the mobile market coupled with the continued growth in the server market should add to Intel's top and bottom lines I would expect the 2nd quarter to be relatively flat in terms of revenue and earnings growth. The increased presence of Intel in the mobile market may cause a slight P/E multiple expansion for the second or third quarter, which will add positive pressure to the share price. The IDC expected single-digit growth in the PC market for 2013, which based on the quarterly forecast of -7% growth in both the first and second quarters suggests positive growth in the last two quarters of the year. Now IDC has reduced its forecast for the 2nd quarter so one would assume the 3rd and 4th quarter would be reduced as well but still shows the expectation that the PC market is turning a corner and starting to slowly grow again. If in fact the third and fourth quarters are flat for revenue in the PC group of Intel it allows the gains in Intel's "Other Architecture Group" to begin adding to the bottom line for Intel instead of covering losses from the shrinking PC market.

The fourth quarter will be the quarter that I believe Intel will begin to show real growth potential and see an increase in both the top and bottom lines for the company. The Bay Trail CPU, which is a complete redesign of the Atom on 22nm. Part of the recent upgrades for both the Clovertail+ and Bay Trail chips are the power management technology used to bring the battery life for these high-power chips way down and allow all day battery life. Below is an excerpt from the Intel web page:

Significant power saving advancements has been made across the processor, chipset and accompanying components, including Enhanced Intel SpeedStep® Technology. This technology enables operating systems to program the processor to transition to lower frequency and voltage levels while executing a particular workload. Also, new lower power sleep states, deeper than C6, and on-die power gating have resulted in a significant idle power reduction over the previous generation Intel Atom processor-based platforms.

The reduction in power usage for these new chips will provide Intel with an advantage over its competitors, which will grow its market share in the smartphone and tablet markets for the fourth quarter of this year and into 2014. The inclusion of support for the Android OS in these new chips will also allow for them to be used in over 60% of the devices in the mobile market, all but BlackBerry (NASDAQ:BBRY) and Apple (NASDAQ:AAPL). The new Clovertail+ chip launched in the second quarter will also be optimized for the Android OS. The production of the LTE chipset, which according to Intel, is the smallest and most energy efficient LTE chip on the market will further help Intel gain traction in the mobile market.

I see now as a perfect opportunity to enter into a position in Intel and take advantage of the historically cheap price for the stock. The upside for Intel is tremendous as it continues to develop chips that are high-powered, energy sipping, and with better and better graphics capabilities. The second quarter with its expected 10% decline of PC shipments will materially affect Intel's performance. The increases in the mobile markets from the shipment of products with the new Clovertail+ chip fully compatible with Windows and Android OSs and the 5% expected increase in the server market will help cover the PC group losses in revenue. The third quarter should have flat or slight growth in the PC market, according to the IDC forecasts, and should show growth for Intel.

As Intel begins to garner market share in the mobile markets we will begin to see a P/E multiple expansion. This will be the secret to excellent gains with Intel. If the PC industry can recover while data centers continue increasing their growth due to the mobile market I predict strong returns for shareholders. The fourth quarter for 2013 will truly be the quarter that provides the clearest picture of Intel's success into the mobile market and should mark the beginning of the real stock appreciation for the company.

Disclosure: I am long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may initiate additional long position in INTC over the next 72 hours.