As 2013 winds up, opinions on the outlook for Intel (INTC) are all over the map. Is it heading for a resurrection based on penetration of mobile or will it decline into obscurity based on the death of the personal computer? Will the Quark innovation capture the Internet of Things (IOT) or will ARM Holdings (ARMH) steal Intel's thunder? Are ARM-based servers going to kill the Intel cash cow in the server market?
There are a lot of forces in play and investors who get it right will make a lot of money and those who get it wrong will suffer.
As most of you know, I am an Intel bull. My bullish views are not near term assessments of the vagaries of the PC market or the competitive advantages of Intel versus Qualcomm (QCOM) or Nvidia (NVDA) processors in mobile devices. It is simpler than that.
We live in a world where the data we create every day is a multiple of all the data created since the beginning of time through 2003 according to Meg Whitman in a speech she gave recently. Whether that is fact or hyperbole does not matter. What matters is that data creation and consumption are growing at an enormous pace. Data analysis is right on its heels. Twenty years ago no one had ever heard of Hadoop. Today it is in the vernacular.
Big data processing requires at least three ingredients. It requires storage, communication and processing power. Storage really means server farms packed full of Intel-based servers. Sure there are servers not based on Intel technology, but they are a tiny fraction of the total. Intel has a massive share of this market and it is growing at about 15% a year.
Intel knows this market well. For 2014, it sees growth of 15% for its Data Centre Group. It should be at least that.
The threat of competition is not new to Intel. It is useful to see how competitors have fared in trying to outgun Intel for the past few of decades. Despite formidable competitors Intel has continued to grow market share in every key market it serves.
I haven't seen anything that persuades me that anything really different is going to happen in 2014.
PC Client Group
The death of the PC is greatly exaggerated. Sure, tablets and smartphones have grown very rapidly and displaced PC demand for those whose PC use was primarily consuming content. But make no mistake, PCs are here to stay and PCs really means Intel processors.
IDC sees PC demand at just over 300 million units for 2013 and about the same for 2017.
Intel pretty well owns this space. It does so because it continues to deliver the greatest processing power in devices that span the full range of price points and form factors. Whether it is a desktop, a laptop, a hybrid or an all-in one it will have Intel Inside 90% of the time.
Intel earns a lot of its income from the PC market. It can do so because it continually reduces the cost of its processors while increasing their performance. Intel's ability to reduce the cost of its processors by 30% a year while improving their processing power and reducing their power consumption is simply unmatched by any competitor.
As a result, Intel can continue to earn margins in the 60% range.
There may even be a bit more growth in the PC market than the forecasters see today. I see a lot of people carrying devices out of Best Buy that reflect the outpouring of new devices in new form factors and at all price points in recent weeks. Intel has made sure that manufacturers can produce the widest range of options possible to meet consumers' needs and tastes.
Other Intel Architecture
PCs and Servers may be enough to hold Intel net income and cash flows at current levels, but the stock will not react positively until investors are convinced Intel can show growth. That growth has to come from two sources: Penetration of mobile and the Internet of Things.
Late to the game and well behind Qualcomm and Apple, Intel can barely be found in a smartphone and has done only marginally better in tablets. CEO Brian Krzanich is setting out to change all that. Recognizing that Intel's LTE technology is well behind Qualcomm, the acknowledged leader, and that it will take several quarters at least to catch up (if Qualcomm can be caught at all), Krzanich has started with an ambitious plan to capture a share of the tablet market. The first foray is the Bay Trail processor which offers 64-bit computing on either Windows or Android OS platforms. Well, almost. Intel still has some work to do to provide full Android support but that work is underway.
For 2014, Krzanich has gone public with his goal of selling 40 million Intel powered tablets. He means business and will meet that goal if it means giving away the processors. Intel announced an $800 million program including "contra" support for manufacturers, the equivalent of $20 for each of the 40 million devices. This suggests that pricing of the Intel chips for tablets will compare very favorably to the ARM-based processors that manufacturers typically sourced for $20 to $30 from vendors like Qualcomm or Nvidia.
Intel's fourth quarter should be worth watching. Intel guided to a pretty soft quarter.
Most analysts are lined up pretty well with the low end of Intel's guidance as reported by Yahoo.com Finance.
On January 15, 2014 we will get the hard data. My view is that Intel will not only surprise to the upside of its range but also will guide to a stronger than expected Q2. Sales of the plethora of new Windows 8 devices with "Intel Inside" appeared strong over the Christmas season, with particularly strong sales of innovative devices like the Asus T100 with Intel's Bay Trail processor. This nifty two in one has long battery life, tons of processing power and ships with a full version of Microsoft Office. The question is to what degree the lower priced Bay Trail has displaced iCore processors.
Remarks by Kirk Skaugen, General Manager of the PC Client Group, may put that concern to rest. He reported that Intel is seeing record demand for core i5 and i7 processors.
Record demand for the iCore products should lead to very strong results since these components carry very high margins.
Not everyone is convinced however. IDC still sees softness in the PC market in 2013 continuing into 2014 although the pace of forecast decline is abating.
Nonetheless, with robust server demand and a solid fourth quarter level of PC demand, at least anecdotally, Intel could put up some decent numbers and give us a glimpse into the outlook for 2014 on January 15th. I would not be surprised to see sales above $14 billion and net income in the $0.55 range, a double digit improvement from 2012.
I am long Intel will call options expiring January 2015 at a $25 strike on 120,000 shares, offset by a 10,000 share short position as a near term hedge.