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Over the past six months, while the S&P 500 Index and the semiconductor group had both rallied 11%, Intel (INTC) share price had been stagnant and lagged the broader market and its peers by a wide margin. During this period, some of the reservations I had six months ago regarding the growth potential of the company's PC chip business and challenges facing Intel in the mobile chip market during 2013 had largely materialized.

At the time I wrote my earlier article, I was optimistic that while 2013 seemed like a flat year, investors could still look forward to 2014 for growth to resume, especially in the server chip and the mobile chip businesses. However, as Intel reported its financial results of the last two quarters and provided its latest outlook for rest of 2013 and full year of 2014, I see very slow improvement in the underlying trend of the company's PC chip and mobile chip business that makes up 70% of the company's overall revenue. The company's faster growing server chip business also disappointed and grew at a much slower rate than the company's long-term growth target CAGR of 15%.

Disappointing Growth In All Operating Segments

The table below summarizes Intel's most recent guidance on segment revenue and operating income through 2014 and my base case estimates of its likely impact in 2014 as well as 2015. Compared to 2012, the PC Client Group (i.e. traditional PC chip business) is expected to lose an incremental $3.5 billion of revenue in 2014, to be offset partially by incremental gain of $2 billion from the Data Center Group (i.e. server chip business). The Other Intel Architecture Group (i.e. mobile chip business) will also see no revenue growth at all compared to 2012 even as the company forecasted a 4x tablet unit shipment increases in 2014 and has announced plans to enter the foundry business to manufacture mobile chips for other semiconductor companies.

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Similarly, for operating income in 2014 when compared to 2012, I estimated that the loss of profits at the PC Client Group together with wider operating loss due to increased capital spending at the Other Intel Architecture Group will more than offset the small incremental increase at the Data Center Group, resulting in another year of lower operating income.

Looking ahead to 2015, I do not see the cannibalization effect that tablets and smartphones have on PC to be lessening. Assuming the PC Client Group continues its slow slide in low single digits, overall revenue at Intel will likely see another slow growth year in 2015 even if one assumes other three key segments ramping up and growing at double digits. Barring any upside surprises in 2014, my current expectation is that investors will probably see a flat to declining revenue and EPS trends from 2012 through 2015.

Valuation Implication

During the last year, despite no growth in revenue and EPS, Intel's P/E multiple expanded by 20% to 12.8x which is at the high end of the P/E range in the last few years. The multiple expansion could be partly attributed to multiple expansion in the broader market but also to investors' optimism that Intel would be able to make significant headway into the mobile chip market soon (i.e. 2014). However, based on Intel's own forecast, it's now fairly evident that 2014 will turn out to be another disappointing year for investors looking for greater market acceptance of its new mobile chip products and higher overall growth since it's increasingly likely that revenue stream from the new mobile chips may not start to contribute meaningfully to the company's top and bottom line results until second half of 2015 or 2016.

As much as I like Intel for its rich dividends (3.8% yield), stable cash flow, and solid balance sheet, I do not believe a P/E multiple at the high end of the range at this point is justified when the company still faces a lot of operational and market uncertainties and may not grow much at all in the next two years. I believe the current price has not priced in the pessimistic message underlying Intel's latest guidance. Over time in the next few months, investors may grow increasingly disheartened of the company's lack of growth and there is a good possibility of P/E multiple expansion reverting to contraction that could send shares back down to $16-$20 per share, the lower end of the P/E range.

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Source: Intel Not Attractive At Current Level, Sees 20% Downside Risk