This year has been reasonably good for the global economy and has showered its favorable tailwinds to a number of stocks. Intel (INTC, Financial) is one stock that has shown an appreciation of approximately 48% due to improving performance and positive outlook. It is significant to note that this leading chip-maker was struggling to sustain its momentum a couple of years of back, when the entire PC industry was facing headwinds from the advent of smartphones and tablets. However, Intel has since innovated on its chip-making ability which has been complemented by the stabilization in PC demand. Hence, it makes sense to analyse if Intel makes a solid investment case.
Hopeful of stable PC demand
There is no denying the fact that the PC business is the heart of Intel. The big question entering 2015, however, is in regards to the ending of Windows XP Support. There was a bump in PC sales thanks to the ending of this operating system, but how long will this tailwind last? Considering that the PC group contributes the majority of Intel's revenues and profits, investors need to hope that we don't see the PC space contract again.
Microsoft (MSFT) has already announced Windows 10 technical preview and investors can hope that this will provide some boost to the PC demand or at least maintain it. Microsoft has promised to ensure an intuitive and wonderful user experience with this version of the Windows. Besides the PC segment, which forms a valuable segment at Intel, data center is the new kid on the block that is gaining significance. This segment of the business showed a more than 15% increase in revenues for the first six months of 2014, as compared to the first half of 2013. Eventually, Intel's mobile business may become the second largest for the firm, but for now, the profitable data center group is important for Intel's success.
Intel also has various new products under its sleeve, such as the first 14-nanometer Broadwell Core M processor-based system and its next generation Haswell-based Xeon E5 platform, code-named Grantley. With the debut of the Intel E5 v3 processor, the tech giant has a slew of related introductions and upgrades on the way for delivering common architectures, including the first DDR4 memory implementation and improvements for its Data Plane Development Kit, Intelligent Storage Acceleration Library, Data Direct I/O, and QuickAssist technology for integrating embedded accelerators.
Growth in the mobile sector
As I mentioned at the very onset, mobile and smart devices have eroded the PC market. Intel has arrived a little late to the party, but in the recent quarters, Intel has made a bit of progress, and smart deals should help fuel the growth of this segment during 2015. Intel still expects to ship 40 million tablet CPUs this year, so we'll see if that happens, and what the company's plan is for next year.
Next year could also prove to be a turning point in terms of profits and losses. In the first half of 2014, the mobile and communications group had an operating loss of more than $2 billion. As Intel ships more tablet CPUs and starts to generate meaningful revenues, losses will subside a bit. Recently, Intel announced a series of agreements with Tsinghua Unigroup to expand the product offerings and adoption for Intel-based mobile devices in China and worldwide, by jointly developing Intel architecture and communications-based solutions for mobile phones. Intel’s deal with Tsinghua Unigroup will give the former a greater footprint in the Chinese mobile chip market, which has become a focal point of the global smartphone industry.
With more than 500 million smartphone users, China is not only the world’s largest smartphone market, but also the biggest smartphone manufacturing hub. With demand for smartphones cooling in the U.S., manufacturers have increased their focus on China. Rising demand for low-cost phones is one of the key factors driving strong mobile sales in the country. Intel’s share in the smartphone market is currently less that 1 percent and this deal will obviously enhance the presence of Intel on a global basis.
Takeaway
Intel is charting a robust comeback path and is making cautious and positive moves in order to strengthen its position. Also, a trailing P/E of 16.5 and forward multiple of 14.5 cite a reasonable valuation for the stock. Therefore, Intel is a stock with sustainable fundamentals and bright outlook.
