With shares of Intel (NASDAQ:INTC) trading between $19 and $21 for the past month, is INTC a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement:
With steadily increasing tablet sales making the predictions for the end of the PC-era a reality, one analyst after another has lowered price targets for the semiconductor manufacturer. On December 20, Evercore Partners analyst Patrick Wang cut estimates on Intel, Advanced Micro Devices (NYSE:AMD) and Nvidia (NASDAQ:NVDA), citing continuing soft demand for personal computers and on November 29, analysts at Citigroup dropped their target to $21 and Goldman Sachs analysts slashed their target to $16.
But Wells Fargo analyst David Wong has predicted a different future. On Monday, he placed the company’s valuation range between $28 and $33 per share, reiterated an Outperform rating, and called the stock his top pick.
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“We think secular themes such as cloud computing and data traffic created by mobile computing (notebooks, tablets and smartphones) could drive x-86 server-related processor growth in the mid-teens percentage range over the next several years,” Wong wrote in a research note seen by Barron’s, “the server processor market has grown from below $2 billion in 2002 to a run rate of the order of $10 billion a year in 2012.”
In his opinion, the development of the Intel Atom chip, a line of ultra-low-voltage x-86 microprocessors, has made Intel a beneficiary of the rapidly increasing market for mobile devices like smartphones and tablets.
Intel has espoused this opinion as well. “As public clouds continue to grow, the opportunities to transform companies providing dedicated hosting, content delivery or front-end Web servers are also growing,” stated the company in a press release announcing the chip’s debut. Despite an early reluctance to pursue the chip’s development, Intel has been forced to develop low-power processors to keep the business of its four largest cloud customers, Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), and Microsoft (NASDAQ:MSFT).
While Wong noted that Intel’s server processor revenue grew 7 percent in the first three quarters of 2012, as compared to the company’s total 1 percent growth decline, Intel remains behind the competition. Before 2011, Intel “actively denigrat[ed] the idea of lower performance but power efficient chips in the data center,” according to GigaOm, and as a result of this stance, other chip manufacturers like Advanced Micro Devices and ARM (NASDAQ:ARMH) have developed a competitive advantage. Intel’s late entrance to the market enabled AMD to acquire the low-power server specialist SeaMicro in February, and helped ARM put its designs in the smartphones and tablets of Apple (NASDAQ:AAPL), Microsoft, and Google.
Furthermore, analysts have expressed concern for Intel’s margins. As Raymond James analyst Hans Mosesmann stated in a recent research note seen by Forbes, the company could be heading for “a potential gross margin nightmare.” With the increasing popularity of lower-margin chips and rising competition from ARM in the microprocessor market, Intel could see its margins fall from the mid-60 percent range to the 50-percent range in the next two years.
But as the demand for PCs continues to decline, it is important for Intel to be able to tap into the market for mobile devices. Gartner, a leading information technology research company, announced in October that worldwide PC shipments totaled 87.5 million units in the third quarter, representing an 8.3 percent decline from a year earlier. IDC, another research firm, also showed that shipments fell more than 8 percent in the most recent three month period. It is the largest drop for the industry since at least 2001.
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