Will Intel Stand A Chance With Its New Xeon Processor?

Jun. 6.13 | About: Intel Corporation (INTC)

Intel (NASDAQ:INTC) has introduced a new xeon processor product into the market. The solution will increase the capabilities of a provider to better support the customers wanting to share their videos on a mobile device. The product is part of Intel's initiative to develop its energy-efficient graphics and its video analytics capacity for its data center product line. In this article, I want to show how a rise in the global data center and video viewing internet traffic will help Intel to increase its data center revenues by 6%. This factor will enable Intel to improve its price multiples.

How will Intel accomplish this feat? The internet traffic is growing, and the consumer demand to view the video through it has increased. According to Cisco, all TV, video-on-demand, P2P, and internet video combined may compose 80 to 90% of the global consumer traffic by 2017. Consequently, the global data center IP traffic will grow at a compound annual growth rate of 23% from 2012 to 2017. Intel will benefit from both trends because its new product has the capability to cope with the rising internet and data center traffic. This will boost the sales of the product and increase Intel's data center revenues.

Financial

Intel, as I wrote sometimes ago, has been successful in growing its data center revenues. In the fourth quarter, the company reported that the data center division increased its full-year revenue by 6% to $10.7 billion. This contributed immensely to Intel's full-year revenue of $53.3 billion.

In the first quarter, Intel reported that its data center division recorded a revenue of $2.6 billion, an increase of 7.5% year-over-year. Apart from the PC Client Group, the data center division contributed the largest amount of money to Intel's third quarter revenue of $12.6 billion and net income of $2.0 billion.

Intel, Video, and data Center

Intel has unveiled a few products to cope with the rising internet video and the data center traffic. The E3-1275 v3 processor has provided the capabilities needed to deliver an improved video content with the data center network. The others in the E-3 series also share this capacity. Intel's upcoming E-3 1230L v3 product will have over 500% better performance per watt advantage over the competing products and will enable a seamless integration with the data center. The E-31220 v3 will be a low-power solution that brings a great reduction in power compared with the previous processors.

Intel's newly-introduced product is designed to handle the video workloads that enable a better data center graphics and the numerous other segment improvements. The processors deliver an energy-efficient performance and over three hundred percent improvement in their graphics performance.

Intel is also introducing the new product to increase its media-processing capacity for its cloud-based providers. Fortunately for the tech giant, the population of the internet video-viewing public and the traffic in the data centers are rising. By developing the new product, Intel will aim to get a head start over competitors such as Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA).

Looking at Intel's revenues, we note that only the PC Client Group generated a greater revenue than the data center division. We also notice that the data center division made an impressive gain year-over-year. So it can be said that Intel is making a progress with the division.

With a price to sales ratio of 2.38, Intel is trading cheaply, especially when it is taken into the consideration that it has an impressive gross margin of 56.17%. The new product will increase the company's data center revenues, prepare Intel for a possible revenue gain in the cloud-based sector in the future, and improve the company's earnings per share to 2.1 or 2.2.

Competition

How is Intel performing in relation to its competitors? With a price to earnings ratio of 12.57, compared with none for Advanced Micro Devices and 15.54 for Nvidia, a gross margin of 56.17%, compared with 40.90% for Advanced Micro Devices and 54.32 for Nvidia, Intel does appear to be operating on a competitive level. The market for the Intel product includes the cloud gaming sector. Advanced Micro Devices and Nvidia have focused on the market with their recent solutions. Nvidia released the Visual Computing Alliance packed with graphics cards. Advanced Micro Devices introduced the Opteron server chips with graphics processors. However, Intel's new product is unique because it also enables a server-based video streaming.

Conclusion

There is a downside to an Intel investment. It has a few problems breaking into the mobile sector and has lost the ground to some companies like ARM Holdings (NASDAQ:ARMH) and Qualcomm (NASDAQ:QCOM). Also, the personal computers are being replaced with newer and better options. However, based on the growth prospects of the data center traffic and internet video viewing in the next few years, we can say the new product will increase the sales of Intel's data center division. Looking at the company's price multiples and its debt, we still say its investors should HOLD the stock in the long term.

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.