Intel Could Hit A Share Price Of $40 By 2016

| About: Intel Corporation (INTC)

In early April I wrote "Intel Will Hit A Share Price Of $36 By 2016". In that article I surmised the upside to Intel (NASDAQ:INTC) stock based on Intel's current push into mobile. As of the date of this article, Intel was hovering just below $25 a share. News recently broke that the Samsung (OTC:SSNLF) Galaxy Tab 10.1 tablet will use the Clover tail+ processor from Intel. This is one of the flagship tablets from Samsung and bodes well for Intel's push into the tablet market. It is also necessary to point out Samsung went with Intel's 4G LTE modem for this tablet as well, pointing to possible greater success in the smartphone market.

I predicted flat growth for Intel's PC Client Group for 2013 with modest gains in 2014 and 2015. I still believe the PC market will recover and begin to grow again as innovation comes to the space, but now I feel my numbers were too optimistic. Revising those numbers I see 1% negative growth for 2013, flat growth in 2014 and 1% growth in 2015. I expect revenue from the PC Client Group to grow by $34.274 billion or exactly the same as 2012. This prediction is rosier than the predictions of the International Data Corporation (IDC) which predicts the PC market will fall another 1.4% in 2014 before stabilizing. The IDC also predicts the PC market will be approximately 333 million units in 2017, which is still 4.5% less than the number of units sold in 2012.

The basis for my prediction for Intel to manage flat revenue growth while the IDC predicts the overall PC market will contract is simple: Intel has been growing its market share in PCs over the past several years with a reported first quarter market share of 85.2%. And the new Haswell processor will deliver even more market share gains. The Haswell processor delivers extreme battery life improvements, doubling the battery life of the MacBook Air 13", while also providing significant improvements to graphics performance of the chip as well. Intel will see strong gains in market share in the laptop and ultrabook segments due to the Haswell.

I also still believe the launch of Windows Blue as well as the launch of Intel's new Bay Trail CPU in the latter part of 2013 will help PC sales remain flat by 2016 instead of negative growth. The adoption of flash memory in the ultrabook and convertible segments of the PC market also serves Intel well since it sells these products and should further increase revenues. All in all, I am predicting flat revenue growth to 2016 for Intel's PC Client Group.

The sales growth in the Data Center Group (DCG) is much rosier than the PC group (PCCG). In 2012, net revenue for this group increased by $612 million or 6% probably powered by the immense growth in cloud computing. Another area of interesting growth is the supercomputing segment. Intel, in a 2011 Investor meeting, described this growth as doubling from a million units for 2013 to 2 million units in 2015. This is the operating group that I see the most growth potential in. In Mr. Eassa's article he discusses the potential growth of this operating group through the impressive upgrade of the product line and he expects high growth figures, I have included an excerpt below:

We believe that this is an unprecedented refresh and extension of the firm's product lineup, and as a result believe that 10% should be used as a pessimistic lower bound on growth in DCG, with 15% Y/Y growth a more realistic target. We also believe that momentum will continue into 2014 as further SoCs built on the new "Atom" core, in addition to a full platform refresh of the Xeon platform to the "Haswell" microarchitecture roll out.

The other aspect of growth I see for Intel is the growth of the microserver segment which is expected to grow at approximately 70% annually, according to TechNavio's analysts. Microservers, at an average price of $55 a processor and 45 processors per server could make this segment of the market worth $1.485 billion in 2014 and up to $2.97 billion in 2016. If Intel takes 90% of this market, which is not overly optimistic, this market could represent 13% growth by 2014 and 26% growth by 2016 for its Data Center Group.

Between the growth from the Xeon refresh and the growth in microservers, I agree with Mr. Eassa and predict 15% year over year growth for Intel's Data Center Group or $5.57 billion in new revenue by the end of 2015.

The Other Intel Architecture (OIA) Group contains several segments; smartphones, tablets, Intelligent Systems Group, and the Intel Mobile Communications. When I wrote the first article predicting a share price of $36, I believed Intel would capture 10-15% of the smartphone market and 15% of the tablet market by 2015. Lazard Capital's analyst Daniel Amir is predicting revenue from tablets to exceed $1 billion for Intel in 2016, which is closer to 25% of the market. Samsung is using both an Atom processor and the 4LTE modem solution from Intel for its Galaxy Tab 10.1 tablet. Samsung is the leading provider of smartphones and tablets and its integration of the processor and modem from Intel bodes well for Intel in the smartphone space.

In 2014, Intel is expected to release its 22nm silvermont microarchitecture processor with integrated LTE and a 14nm processor the following year. These process improvements will put Intel at the leading edge and I would expect Intel to capture 20% of the smartphone market. If Intel can capture this market share, it could be worth $3 billion in additional revenue by the end of 2015.

Just as exciting as the smartphone and tablet markets is the intelligent systems market. I read a press release on Research and Markets: Global Intelligent Systems Market Report 2012-2016. This report highlighted TechNavio's forecast that this particular market would grow at a 16% clip through 2016. It also named the key vendors "dominating this market" as Texas Instruments (NYSE:TXN), Freescale Semiconductors (NYSE:FSL), Infineon Technologies (OTCQX:IFNNF), and Intel. With Intel's purchase of Infineon Technologies, this gives Intel an even more dominant position in a market that is growing quickly. I previously predicted between smartphones, tablets, and intelligent systems, this operating unit of Intel's would add $2 billion in revenues by the end of 2015. Now with the performance to date in the smartphone and tablet markets by Intel, the design win from Samsung, and the launch of an integrated LTE solution, I see this operating segment's revenues easily growing by $4 billion by the end of 2015. Please note that is far less than the $6 billion I actually expect revenue to grow as a way to curb my enthusiasm.

The Software and Services Operating Segment (SSG) is the last operating segment I discussed in the previous article and I believe my prediction for revenue growth for this segment to stand at $3 billion by the end of 2015. McAfee is positioned well in the growing Mobile Security Market and the Intel-owned Wind River is focused on the mobile and embedded markets-- two markets with terrific growth potential.

Total Revenue Growth by the end of 2015 (in Millions)

  • PCCG - $0

  • DCG - $5,570

  • OIA - $4,000

  • SSG - $3,000

Total: $12,570

The above bullets show the additional revenue that I expect Intel to grow through the end of 2015. As I did in the last article, I am going to assume that last year's percentages for net margin hold true for 2015. This is a simplistic approach since each operating segment carries different gross margins. However, since Intel is very large once we pool all of the revenues together, I felt this would be accurate enough for this exercise: $12.57 billion in new revenue at the 2012 net margin of 20.6% is $2.59 billion in earnings.

Before I produce a share price, we need to look at the share repurchase program. In 2012, Intel repurchased over 190 million shares. The cheap share price of Intel, cheap interest rates for debt and the free cash flow from the company lead me to believe they will continue to repurchase shares at their current rate. If this is correct, that would leave approximately 4.6 billion shares (diluted) by the end of 2015. The additional earnings would equal $.56 per share and when that is added to the 2012 EPS of $2.39, our total EPS would be $2.95. At the current Price/Earnings multiple of 12.25, that would mean a share price of $36.13. This P/E is very low historically and if Intel can execute on its strategy on mobile and we see gains in the other Intel architecture and software operating groups, I think the market will reward Intel with a greater multiple.

The 5-year average for Intel is 16, so even if we only see a multiple expansion to 13, that would produce a share price of $38.35. It is my belief that as Intel continues to win market share in the mobile market, we will see the P/E increase to 13.5 or possibly higher depending on Intel's success. If the PC market begins to expand again, that will also have a positive impact on the PE multiple. I see great upside potential in Intel and a killer dividend to boot. My prediction for the end of 2015 is a share price of $40.

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.