Intel (NASDAQ:INTC) has made it clear it intends to penetrate the mobile computing space in a serious way. If it has any level of success, what will it mean to Intel shareholders and the Intel share price? This article sets out a bull case for Intel and why it might be worth $50 or more by 2017.
The 2013 world smart device market comprises 918 million phones and 191 million tablets in addition to 134 million desktop and 187 million laptop computers, based on IDC estimates. In an earlier article, I postulated on how that might translate into industry profits and while by no means did I find there was a consensus among those who commented on the article, there was considerable discussion suggesting that shifts in market share made major differences to the success or failure of suppliers, particularly those like BlackBerry (NASDAQ:BBRY) and Nokia (NYSE:NOK) with very low market shares today.
IDC forecasts rapid growth in smartphones and tablets with somewhat sideways movement in the market for desktop and laptop computers, as shown in the table below.
World Smart Device Market (millions of units)
Just as there are shifting sands in the fortunes of device manufacturers, the recent innovations by Intel and their push to make material inroads into mobile has generated active discussions through the medium of many articles by such experts as fellow SA contributors Ashraf Eassa and Russ Fischer. The technical side of the battle for mobile processor market share has been widely discussed in those articles. And, a recent article by SA contributor Paolo Santos took a shot at what it meant for Intel in the short term.
This article is an effort to advance the business side of the discussion by putting the four corners on the dimensions of the opportunity for Intel looking out as far as 2017 and using IDC forecasts as a reference point.
To do so, I have made a number of assumptions:
- Intel was inside only one percent of smartphones and two percent of tablets in 2012. I have no idea if this is accurate but it is certainly in the ball park of common sense. Intel was in a handful of smartphones and a couple of dozen Windows tablets for the year.
- Intel was inside 90% of desktops and portable computers in 2012. I don't think this is controversial even if it is not precisely accurate.
- In 2013, Intel will increase its share in the smart phone market to 3% and by 2017 to 15%. These numbers are put out as reference numbers and you can easily substitute your own guesses. The point here is not accuracy but sensitivity.
- In 2013, Intel will increase its share in the tablet market to 20% and by 2017 to 30%. With over 30 tablets already in the market with "Intel Inside" running both Android and Windows, these numbers seem reasonable to me. Of course, and once again, you can substitute your own assumptions and do the mathematics for yourself since the process will be transparent.
- Intel will maintain a roughly 90% share of the processor market for desktops and laptops. The recent announcement by Apple of Intel Haswell processors in MacBooks lends some credence to this view.
While I have made a lot of assumptions here, the assumptions are directionally correct in my view, and easily "corrected" by those taking a different one.
The result is set out in the table below. The number of devices with "Intel Inside" would grow (based on these assumptions) from 325 million in 2012 to some 677 million in 2017, a growth rate of about 17%.
World Smart Device Market with Intel Inside
It is hard to put a precise number on what that means in terms of revenue and net income but it can be broadly dimensioned. First, Intel reports that about 64% of its 2012 Revenue arose from its Personal Computer Client Group, or about $33 billion, and that this proportion has been relatively constant since at least 2010.
Intel Revenue by Segment
If you assume the average selling price ("ASP") of the Intel components inside desktop and laptop PC's was $105 and the ASP of the Intel components in smartphones and tablets was $40 per unit, you arrive at about $33 billion of revenue for the PC Client Group in 2012. I am going to use these ASP's going forward since they produce a somewhat credible result.
Applying these ASP's to the unit sales I have estimated in the above table, I get revenues of $33 billion in 2013 (essentially flat to 2012 with mobile wins barely offsetting declines in PC demand) but growth to $49 billion in 2017.
At 60% gross margin and a 29% tax rate, the incremental net income from Intel's penetration of mobile (at the levels I have set out) amounts to $6.6 billion after taxes or about $1.32 per Intel share. Presumably the other 36% of Intel's revenues that do not relate to the PC Client division will grow modestly as well. If so, a reasonable estimate for 2017 Intel net income might be $3.75 to $4.00 per share, up from $2.20 in 2012.
In my view, if Intel succeeds in penetrating mobile in any meaningful way and the market starts to see Intel as a growth company again, the shares should trade at 12 to 14 times earnings. This would support a price in the $50 range only 4 years from today.
I know I have set out a lot of assumptions, guesswork and pure speculation. That is the lot of a forecaster and in many ways the lot of an investor. But the bull case for Intel has to be supported by a believable theory that it can grow profitably and this is mine. I am long Intel.
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.