Buy These Winners Of Windows 8

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 |  About: Intel Corporation (INTC), Includes: AAPL, DELL, HPQ, MSFT, QCOM
by: Bidness Etc

In part one of our Windows 8 winners review, we are focusing on the main semiconductor beneficiary, while part two will focus on OEMs. Intel (NASDAQ:INTC) is one of the key suppliers of the Windows ecosystem. The Windows 8 launch is going to considerably boost PC sales, and pump up stock prices of companies belonging to the Microsoft (NASDAQ:MSFT) ecosystem. The Microsoft Surface might be that perfect mix of a tablet and PC that consumers were looking for, and Intel is primed to benefit from such an outcome. The semiconductor giant is the biggest chip supplier for the Microsoft tablet. The stock is currently trading at valuations (forward P/E) of 10x; 33% lower than the NASDAQ, therefore, we are bullish on INTC and give it a buy recommendation.

The launch of a new Windows OS is considered to be one of the biggest events in the technology sector. However, the magnitude of this event along with its following has lessened as of late. The rise of Apple (NASDAQ:AAPL) and smartphones/tablets has affected the popularity of PC computing, and has therefore slowed down Microsoft 's growth and that of its ecosystem. The entire ecosystem is under long-term threat due to its failure in evolving with the market. The Windows 8 is a bid to jumpstart this evolutionary process, and bring tablets/smartphones into the Windows ecosystem. The growth might have slowed down, but Windows still completely and totally dominates PC computing. The Microsoft ecosystem contains a number of companies that are associated with words such as quality, reliability and innovation. We are bullish on the long-term prospects of the Windows 8/WP8 operating systems, and believe they will drive up MSFT's stock, along with the stocks of its partners.

Intel Corporation

The world's most renowned processor manufacturer is currently trading at a forward P/E of 10x, as compared to an industry average of 56x. INTC has a solid record of dividends and buybacks. The company has a dividend yield of 4%, as compared to the industry average of 2%. The company is currently the world's largest manufacturer of semiconductors. The product mix is dominated by PC hardware, which has been the primary reason for the slowdown. Competitors such as Qualcomm (NASDAQ:QCOM) have blossomed due to the fast growth of the smartphone industry, for which it is a leading supplier.

INTC is finally making a 'give it everything' effort to carve out a share for itself in the smartphone market. The 'Intel Inside' campaign was a highly successful branding campaign, and Intel is bringing it to the smartphone industry. Motorola is the biggest smartphone player as yet to adopt the 'Intel Inside' logo. We are bullish on these new marketing efforts, but believe that in the immediate future, Intel's fate remains tied to PC and tablet sales. The biggest impact on Intel's PC and tablet-based products sales will be the launch of the Windows 8.

$ millions

2009

2010

2011

1Q2012

2Q2012

PC Client

26,175

30,327

35,406

8,451

8,684

YoY

16%

17%

QoQ

3%

Data Center

6,450

8,693

10,129

2,453

2,804

YoY

35%

17%

QoQ

14%

Click to enlarge

The table given above shows the segment-wise breakdown of Intel's revenues. As can be seen, the company earns its major revenue from PC clients. This segment has shown a 3% QoQ growth, according to last quarter results. We believe the PC client segment will greatly benefit from the Windows 8 launch; this segment contributes more than 60% to total INTC revenues.

Conclusion

Analysts are giving consensus estimates of $2.2 per share for next year. Using the NASDAQ P/E of 15x, we can set a price target of $33. A price target range of $27 and $40 can be established by using the highest and lowest EPS estimates for 2013. A $33 price target gives a 50% upside to the current price of $22. The launch of the Windows 8 and Surface Tablet will be major catalysts for Intel. We believe that the Microsoft Surface has the capability to shape the future of computing through its effective usability mix of a tablet and a PC. Intel is providing chips for the Surface, and we believe this will be a game changer for the company. The dominance of Intel in Windows 8 products along with its new 'Intel Inside' campaign shows that Intel is very well placed to carve out a substantial share in handheld devices and improve its PC revenues. Therefore, we are giving a buy rating on Intel.

The second part of this thesis will focus on Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ) as the winners of the Windows 8 launch.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Technology Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.