Does Intel Have A Chance With Its New Microarchitecture?

May.17.13 | About: Intel Corporation (INTC)

Intel (INTC) has introduced Silvermont Microarchitecture to deliver energy efficiency to products in a wide range of market segments. The product is targeted at data centers, tablets, smartphones, microservers, and other solutions. In this article, I want to explain how data center traffic will favor Intel's initiative. I particularly want to show how rising data center traffic will enable Intel make long-term returns with the new microarchitecture.

How can Silvermont Microarchitecture improve Intel? Enterprises, private individuals, and government agencies are moving content and services across multiple devices. This development is increasing data center traffic worldwide. Cisco Global Cloud Index predicts the trend will make data center IP traffic to grow at a compound annual growth rate of 31% from 2011 to 2016. Silvermont architecture will benefit from this trend. In other words, Intel will ensure long-term returns with increased data center use of Silvermont Microarchitecture.

Financial

Intel's sales growth is inevitable. The data center sector boosted Intel revenues in the fiscal 2013 first quarter report. It grossed $2.6 billion, an increase of 7.5% compared to the same period in 2012. Data center business allowed Intel to report a net income of $2.0 billion and revenues of $12.6 billion.

"Amidst market softness, Intel performed well in the first quarter, and I'm excited about what lies ahead for the company," said Paul Otellini, Intel CEO.

In the fourth quarter report, the data center sector recorded 2012 full-year revenues of $10.7 billion, an increase of 6% compared to 2011. The sector recorded a fourth-quarter revenue of $2.8 billion, an increase of 7% sequentially and 4% year-over-year.

"The fourth quarter played out largely as expected, as we continued to execute through a challenging environment," said Otellini. "We made tremendous progress across the business in 2012, as we extend the market for smartphones and tablets, worked with partners to reinvent the PC, and drove continued innovation and growth in the data center."

Data Center

Intel's data center solutions have propelled the company to new heights in research and discovery. They integrate technologies, trusted tools, and infrastructure that help consumers optimize at every platform level. The company is about to release Merrifield to boost improved performance and battery life over current-generation products. Intel's Avoton will ensure efficiency and improved performance for storage in the data center. Intel will refresh its line of Xeon processor families across data centers to deliver better performance-per-watt.

The just-released Silvermont Microarchitecture is directed at low-power requirements in market segments. Apart from being a foundation for a range of Intel's future products, it will bring performance increases and energy efficiency. "Silvermont is a leap forward and an entirely new technology foundation for the future that will address broad range of products and market segments," said Dadi Perlmutter, Intel's executive vice president. "Early sampling of our 22nm SoCs, including 'Bay Trail' and 'Avoton,' is already garnering positive feedback from our customers."

Intel needs the Silvermont product to maintain its leadership position in the data center sector. The product will also be crucial as Intel makes an inroad into the tablets and smartphone market. Fortunately, Intel's products in the data center business are driving sales. This is important to Intel, as it strives to gain a head start over its rivals.

Looking at the data center revenues of Intel in the recent reports, we saw growth year-over-year and sequentially in the fourth quarter. It is clear Intel has been improved by solutions in this area. So it can be said that the company is making progress.

With a price-to-earnings ratio of 12.03, Intel is trading cheaply, especially given its impressive gross margin of 56.17%. The Silvermont Microarchitecture will increase data center revenues, reduce Intel's debt of $13.35 billion, and strengthen the company's earnings. Investors will gain rewards that establishes a new benchmark for performance.

Competition

With an EPS of 2.0, compared with -1.0 for Advanced Micro Devices (NASDAQ:AMD) and 0.93 for Nvidia Corporation (NASDAQ:NVDA), gross margin of 56.17%, compared with 40.90% for Advanced Micro Devices and 52.90% for Nvidia, Intel does appear to be operating at a competitive level. Advanced Micro Devices has the lead in low-power processing with products such as AMD Embedded R-Series Family of Processors. Intel's new product enables the company to compete with AMD. Nvidia's Testa line of products provide efficiency and good performance. Intel's new product will negate any advantage to Nvidia as well as deliver innovations that will optimize data centers for better performance.

Conclusion

Based on the performance of Intel's data center products and the growth projections for the sector, we can say Silvermont Microarchitecture will improve the fundamentals of Intel. Looking at Intel's debt and price multiples in relation to Advanced Micro Devices and Nvidia, we can say HOLD the stock for now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.