Intel: More Than Just Laptops And PCs
Summary
- Strong growth trend in data-centric business, mainly led by cloud computing infrastructure.
- The PC business remains robust, with 8th-gen CPUs gradually infiltrating the market. Intel's partnership with AMD ensures near-monopoly in the industry.
- The company has engaged in exploring different areas such as AI, drones and autonomous vehicles, which are expected to be executed in the coming years.
- Strong buyback record and healthy dividends remain lucrative to income investors who want to taste the growth flavour of tech.
Intel (NASDAQ:INTC) had posted strong results for 2017, despite the "Spectre" and "Meltdown" security flaw within its CPUs. Operating performance has outperformed market expectations, and 2018E earnings continue to see strong growth as effects of the tax reform will materialise.
As shown, INTC has performed positively versus its peers.
Data, Cloud and AI: Powering INTC's Future
The strong growth of the Company’s results is mainly driven by the Data-Centric business unit. YoY revenue is up 20%, while operating income is up 59%. All sub-units of the business unit achieved over 10% YoY growth, with the Non-Volatile Memory Solutions Group (NSG) gaining 37% YoY due to the introduction of the Company’s Optane memory solutions to enterprise data centres. The Optane series is expected to continue its popularity given the demand for more efficient memory solutions.
The Data-Centric unit is expected to continue generating organic revenue for the Company given the strong growth in demand for cloud computing systems. As a key manufacturer for cloud computing operating systems, Intel has been posting healthy growth in this particular business as big players in the market such as Amazon (AMZN), Alibaba (BABA), Google (GOOG, GOOGL), IBM Corp. (IBM) and Microsoft (MSFT) are aggressively expanding their cloud computing services.
Source: Gartner (October 2017)
Furthermore, Intel has recently ended its joint development partnership with rival Micron Technology on 3D NAND (a type of non-volatile storage flash memory), which, from our perspective, is beneficial to the Company due to the fact that it has not been prioritising this project, and hence, more capex can be allocated to other projects. The Company is also hinting stronger research and development efforts into new niches such as autonomous driving, AR/VR/MR, drone technology, artificial intelligence, memory and 5G networks, deploying more capex into these sectors and with much of the executions being planned out in the following years. Some has been showcased at the 2018 CES earlier in January.
BofAML recently published its thematic research looking ahead into 2020 and 2023, highlighting robotics, AI, VR/AR/MR, drone technology, Big Data and future mobility as some of the key growth areas as we progress into the next 5-10 years. INTC has a material exposure is these areas in terms of its R&D efforts, as well as possessing high levels of competitive advantage as well.
PC Business Still Sees Healthy Growth, But Nowhere Substantial
The revenue impact of the latest 8th-generation Core series (i3, i5 and i7), flagship CPUs of the Company, should materialise over 2018 as new personal computers will spec the two processors. An update for the X series of i5, i7 and i9 CPUs is also due this year. Over the past 3 years, as blockchain technology, cryptocurrencies and PC gaming have been gaining significant attraction and experiencing strong growth, gaming PCs and ultrabooks have dominated mid- to high-end PC sales. The demand for computing power for personal usage is high, and the gaming PC market is expected to reach US$30 billion by 2019. Intel continues to operate effectively as a monopoly in the CPU market, even though key rival AMD has captured some market share in the past few quarters.
INTC vs. AMD in x86 CPUs
However, the Company has been struggling to keep hold of its dominance in the market of graphics processing units (GPUs). The market had faced strong demand-pull growth due to the popularisation of PC gaming and cryptocurrency mining. Nonetheless, even though the Company has monopolised the GPU market for low- to mid-end PCs with models such as the Intel HD 620, higher-end models such as the Intel Iris series and Intel UHD series are unable to gain strong market share compared to specialised firms such as Nvidia (NVDA) and AMD.
In particular, Nvidia has seen an 8-fold increase in share price since 2016 due to the demand for its proprietary gaming GPUs, mainly led by gamers and cryptocurrency miners. We expect that the Company will not actively attempt to compete in that niche due to limited growth potential, and it should continue to take advantage of its monopoly position in the low- to mid-end market. The partnership between Intel and AMD in an “Intel CPU, AMD GPU” distribution model should reap positive benefits for the Company, as both firms are utilising their comparative advantages to compete against Nvidia.
My Investment Thesis
The business model of INTC consists of a diversified variety of semiconductor and hardware production and services, allowing it to be less cyclical compared to rivals such as Micron (MU) and Western Digital (WDC) in the memory subsector, and AMD and NVDA in the CPU/GPU subsector.
The Company also shows mixed valuations compared to these comparables. Clearly, INTC is in somewhere between the two distinct subsectors, reflecting its diversified business.
Its dividend growth will remain stable, and yield should remain at current levels of about 2.5%. The Company's financial health complements the dividend growth (37.3% dividend payout).
My price target for INTC is $55 in the next 12 months, based on a 5-year cash flow model. My forecasts imply a forward P/E of 14.66 and 2018E EPS of $3.75. This is in line with the general consensus. I am rating INTC as a Buy based on two clear reasons. Firstly, the Company's strong competitive advantage gives it a distinct advantage in developing new solutions for the high-growth sub-sectors within technology. Secondly, its financials remains robust and healthy, and valuations remain attractive amid the continuous rally in the general market over the past year.
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