- Intel’s PC segment is likely to see further declines in 2016.
- Unfortunately, this negatively affects Intel's near-term revenue and earnings outlook.
- However, I believe Intel is inherently undervalued and has decent upside despite weakening PC trends.
Though it pains me to admit this, Intel (NASDAQ:INTC) seems poorly positioned to beat expectations in its Q1’16 earnings announcement due to weakening trends in seasonal comparisons in the consumer PC business. Intel anticipated that it was going to bring the business back to flat y/y comparisons. However, unless sales prove to be more back-half weighted than in previous years due to better than expected cyclicality in PC refresh, the consumer PC business is poised to see another year of declines. The issues are somewhat structural, but aren’t insurmountable in the case of Intel, as the company has shifted its engineering focus to be more innovative in a space where innovation has been absent.
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In the middle of the year, Intel plans to launch more high-end SKUs for its Core i7 line-up, so there won’t be any near-term catalyst to sales unfortunately. The high-end 6-series SKUs will be based on Broadwell architecture, which reduces heat thus providing further flexibility for Intel to offer more core/threads and higher overclocking capabilities. The market for high-end CPUs has proven to be more resilient as many of the higher-end applications require more processing/graphics capabilities to be utilized properly, and while Intel does offer a compelling suite of CPU products, its efforts in integrated graphics haven't opened the PC market for mainstream PC gaming. Intel isn’t going to offer very noteworthy features with its embedded graphics line-ups, with the exception of better performance for 4K content. Unfortunately, Intel’s not too focused on graphics, and in adjacent products where it could expand much quicker (like SSDs), the company isn’t very price competitive.
RBC Capital Markets released a report citing consumer weakness:
We are adjusting our estimates lower on INTC for Mar-qtr and FY16 to reflect PC-centric headwinds. We expect INTC's CCG segment (59% of sales in Dec-qtr) to decline double-digits in Marqtr, worse than historical seasonality. PC OEM Commentary continues to remain muted with increased risk in EMEA in H1:16. Also, component data - both HDD and ODM centric - has been incrementally more negative.
Intel’s consumer revenue tends to be weaker by 10% q-o-q due to seasonality whereas server revenues tend to be evenly distributed with some softness during the summer months. Consumers tend to save up for discretionary purchases in the beginning of the year before being swept away by the heavy promotional activity during the winter quarter.
Credit Suisse mentioned in a supply chain report that things are worsening for PC OEMs:
Jan NB ODM shipments declined 25.0%/36.2% YoY/MoM driven by order declines from US OEM consumer models, and off a higher Dec base. Compal and Quanta were impacted the most; their Jan shipments declined 45.2% and 42.5% MoM, respectively. Feb MoM declines are likely to moderate from a lower base. ODM units have limited March visibility, but units are on average up 30% MoM. ODM units are behind our 1Q16 estimates. We're projecting a 15% QoQ decline, but could see >20% declines given January's run-rate. Seasonal growth for the rest of the year yields 8% YoY decline; 3% above seasonal per quarter leads to our -2% forecast.
Notebook shipments have been weak in the month of January, as a 36.2% month over month decline is well above seasonal trends in weakness. The decline will level out as March tends to be a stronger month, but at the current trajectory Credit Suisse’s estimate of 20% decline for quarter one shipments among PC OEMs seems reasonable. It’s not clear if PC OEMs are still struggling with inventory in the channel from the holiday quarter or if issues are more isolated to demand in the first quarter. The market will likely recover in the second half, but due mostly to seasonality. And again, unless there’s an unanticipated recovery to demand due to better than expected PC refresh trends, we’ll experience another year where consumers opt to hold onto their aged PCs.
PC OEM sales numbers are indicative of Intel’s CPU shipments, however things will likely improve on the ASP front as Intel is expected to release more high-end SKUs, which should help to mitigate a year where PC shipments could decline anywhere from 5% to 10%. Intel managed to capture some of the PC weakness in its guidance, as they had mentioned that China would be a foreseeable headwind. However, I find it highly improbable that expectations were for such a steep drop off going into Q1'16. Some of the findings on the PC supply chain are captured by sell-side models, so I’m not anticipating expectation risk going into the Q1’16 earnings announcement in April. However, investors should lower expectations on returns given the changing dynamics among PC OEMs.
I continue to reiterate my buy recommendation, and lower my price target on Intel from $40.67 to $38.79. I’m anticipating the Client Computing Group to report a decline in revenue of 5% in FY'16, but margins are likely to improve as Intel will successfully shift more of its sales to higher-end CPU SKUs. The datacenter group could report revenue growth in excess of 15% due to its penetration of Xeon-class CPUs into mobile base stations. As such, it’s not that I’m betting against Intel, but I am resetting my expectations on sales and earnings going into 2016.
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