|Shares Out. (in M):||4,835||P/E||13.9x||12.7x|
|Market Cap (in $M):||159,748||P/FCF||14.8x||13.4|
|Net Debt (in $M):||-343||EBIT||15,803||17,118|
|Borrow Cost:||Available 0-15% cost|
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- Note that CapEx continues to outpace D&A which will be another drag on earnings
- Apple has been rumored to be considering cutting out INTC's chips in its laptops and instead use its own internal solutions. Certainly not a guarantee, but is another incremental challenge for INTC and represents some of the pressure it will feel as customers fret about such an important sole supplier
- The popularity of Chromebooks and other lower-performance offerings suggest that a large portion of the PC buying public is more price-sensitive than performance-sensitive which will create further pressure.
- INTC's PC business does not decline or declines very gradually
* Certainly possible but, since they don't have the ability to grab much additional market share (and the vendors will not tolerate a single supplier if they can possibly avoid it) INTC is at the whim of the PC end market and that is currently projected to be flat to down in 2015 plus ASPs appear to be on a continued downtrend
* Even management's guidance for FY15 includes a forecast of for flat units and a decrease in ASPs.
* Recent management disclosures have shown utilization at or near all-time highs which will cap the upper limit of further margin improvement
- The Data Center unit (DCG) makes up the loss in profitability from PCG
* Possible, as DCG is another market that INTC almost solely owns, but PCG represents 2x the revenue and 80% more OpInc. Even at management's projected growth rate for DCG (+15%), it will struggle to make up the gap if PCG's margins decline
* DCG is also a chunkier business with low visibility and so will likely command a lower mutliple
* INTC is even more dominant in data centers than in PCs and customers are eagerly looking for another supplier, several of which are mooting an entrance (including Qualcomm). Just the threat of entry will moderate INTC's ability to extract better prices.
* Even in the event that DCG does manage to make up the difference, we believe the stock is unlikely to rerate positively.
Bottom Line: We have a great deal of respect for INTC but believe the current valuation simply capitalizes INTC's recent excellent results at too high a rate as the various elements of INTC's dilemma we have highlighted here become more obvious.
Most Recent IDC Data: http://www.idc.com/getdoc.jsp?containerId=prUS25372415
Disclosure: We are currently short INTC.
- Earnings and estimates around PC volumes and prices
- Further evidence of the end of the XP-driven refresh cycle
- Potential entrants in either of its core markets
- INTC gives back some of the share it took near the end of FY14
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