Forecasting Intel's 2013 And Share Price

Jul. 9.13 | About: Intel Corporation (INTC)

Intel Corporation (NASDAQ:INTC) is in transition. After years of dominating the PC and Server markets, the firm finds itself as a laggard in the mobile computing revolution. Intel's processors have typically been known for their performance, but in terms of power consumption, the processors drain batteries relatively quickly. Intel came up with a plan.

The firm decided that it could no longer watch rivals gain traction by competing in mobile technology; Intel made the strategic decision to join the competition in the mobile computing market. Thus, Intel started designing processors that would not only perform at a high level, but also maintain battery life. The transition from a mostly PC oriented company, to a company that also competes in mobile is taking years.

At this point, Intel is slated to release a processor in the fourth quarter of this year that will power mobile devices. That said, PC sales continue to slump and Server sales are declining. This puts Intel in a difficult position. The company continues to face weakness in its main operating segments and will not see benefits from developing a processor for mobile devices until 2014.

With that in mind, I expect Intel's financial performance and valuation to take a turn for the worst in 2013, but investors should use that weakness to accumulate shares in the $17 to $22.50 zone. Intel is well positioned to continue competing in the technology sector, and investors should see the benefits of the transition in 2014-2017.

Current Affairs

Intel is devoting more resources to processors for smartphones and tablets as the firm seeks to increase its less than 1% market share in tablets and phones. Tactically, the company plans to use the same advanced manufacturing for the Atom line of low-power cheaper chips for smartphones and tablets that was previously used for Core processors for desktops and laptops. Tablet shipments are expected to eclipse PCs by 2015; thus, Intel is attempting to position itself to capture market share in the expanding market segment. Also, Intel plans to begin selling a set-top box offering Internet-based TV this year.

Intel's Xeon Phi coprocessors and Xeon processors powers the world's fastest supercomputer. Further, Intel's processors power more than 80 percent of all systems on the Top 500 list of world's most powerful supercomputers, including 98 percent of new listed systems. Intel maintains its dominance of the high-end processor market. The high performance computing server segment is expected to grow its annual revenue by 36 percent from $11 billion to $15 billion over the next four years.

Intel's Solid-State Drive Data Center S3500 Series delivers next-generation performance to meet the growing storage needs of cloud computing. Cloud computing is one of the fastest growing areas in the technology sector.

The Intel Atom processor should be released for the 2013 Holiday. The 22nm Intel Atom processor is aimed at the tablet and 2-in-1 device market. Samsung and Lenovo are among the companies set to release devices featuring Intel's processor, which is the latest attempt by the companies to gain market share in the fast-growing mobile computing market segment. The new Atom processor supports the Android and Windows operating systems. With Intel processors powering devices from market leaders in mobile computing, Intel is likely to gain market share in mobile, which is bullish for common equity shares.

Intel remains a dominate player in the technology sector. What remains to be seen is how well the company will perform in the mobile computer industry. The Atom processor is a step in the right direction towards gaining market share in mobile, and I expect it to have a positive impact on Intel's financial performance in 2014 and 2015.

Segment Analysis

Intel has four main operating segments. In this section, I will present my forecasts for fiscal 2013. The PC Client Group, and Data Center Group are the two largest operating segments. The Other Architecture Group is the segment responsible for producing technology for mobile computing.

The PC Client group is facing an environment of weak demand. Consequently, I am forecasting revenue in the $30 billion to $32 billion range in the current fiscal year. That follows a 3 percent decline in revenue to $34.27 billion last year. Further, the operating segment should see its operating margin contract to the low 30 percent range.

The Data Center Group reported relatively weak first-quarter results. Thus, I'm forecasting revenue in the $10 billion to $11 billion range. Revenue in 2012 was $10.74 billion. Additionally, the operating margin may contract to the mid to low 40 percent range.

The Other Architecture operating segment posted a weak first quarter. Consequently, I am forecasting revenue in the $4 billion to $4.5 billion range. This segment could post solid fourth-quarter revenue on a strong product refresh cycle. Also, the segment may post and operating loss in 2013.

The Software and Services operating segment is the best-performing operating segment. Consequently, I'm modeling 2013 revenue in the $2.2 billion to $2.6 billion range. Revenue in 2012 was $2.38 billion. The segment may post an operating profit this year.

The segment analysis paints a neutral-to-bearish picture. The performance of PC, Data Center and Other Architecture is weak; revenue could decline and margins may contract.

Consolidated's Financial Performance Forecast & Valuations

In terms of revenue, I'm forecasting 2013 revenue in the $50 billion to $53 billion range, a decline compared with 2012. The weakness in the PC industry will continue to weigh on Intel's financial performance. Operating income could be in the $12.5 billion to $13.25 billion range, and net income could be in the $9.5 billion to $10.07 billion range.

INTC S&P 500 INTC 5Y Avg*
Price/Earnings 12.0 16.6 14.5
Price/Book 2.3 2.3 2.4
Price/Sales 2.3 1.5 2.5
Price/Cash Flow 6.1 9.9 6.4
Dividend Yield % 3.7 2.2 3.4
Click to enlarge

*Price/Cash Flow uses 3-year average.

Relative to the S&P 500 Intel is undervalued; the price/earnings, price/cash flow, and dividend yield suggest Intel is undervalued. The price/sales ratio is above the S&P 500, but the price/book value is the same as the broader market. Relative to its 5-year average, Intel is undervalued.

The valuations are justified as the market discounts weak financial performance in 2013. In other words, declining revenue and net income are weighing on the valuations and acting as a headwind to multiple expansion. With weakness in servers, PCs and mobile, there isn't much going well for Intel right now. That said, there could be some strength in mobile in 2014 and 2015. Thus, right now, the valuations are justified.

Forecasted Share Price

In terms of forecasting potential entry zones, the $28 level and the $26 level will be used. The $28 level is the 2012 high, and the $26 level is the 2013 high.

I consider the $22.50 to $17 range an accumulation zone. Based on the financial performance forecast, $17 is possible; thus, risk should be managed according to that expectation.

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.