How Intel Can Thrive As PC Sector Lags

Chris Lau, Kapitall: When Intel (INTC) revealed a rise in inventory sitting in its distribution channels, it was a blow for investors still waiting for the PC sector to improve. Intel acknowledged that the Haswell chip refresh will not yield stronger sales in the short term. Not until late August or early September will Intel gain a better sense of its recent sales trends.

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Yet despite the fact that weakness in the PC sector is expected to continue, Intel looks positioned to thrive.

Financial Summary

Inventory grew in Intel’s second quarter. The company attributed the increase to customers beginning to build PCs based on the Haswell processor line-up. Overall, inventories remain well-below historical averages. Intel expects revenue to be at the same level as last year. To adjust for a weaker PC market, Intel is reducing its capital expenditure by $1 billion, to $11 billion. Gross margins are expected to be 59%, as opposed to the prior forecast of 60%.

For the next quarter, Intel forecast revenue would be $13.5 billion, up 5% from last quarter. Gross margins are expected to increase by 3 percent, to 61%.

Haswell in Focus

Intel is diversifying away from traditional PCs, into such devices as ultrabooks. The refresh of chips, including the Haswell, could still improve margins and profits. Intel released quad core products last quarter and this quarter, dual core processors will follow as lower priced products. For now, Intel will not be able to determine if sales will improve, but the chips do offer some innovation for consumers. Devices can now be built without the need for fans to cool the chip. In 2014, the Bay Trail chip will introduce even more innovation – at only 14 nanometers, it will use even less power or produce less heat.

$200-$400 PCs

Intel pointed out during its most recent conference call that clam shell sized computers will reach the $300 range. The hybrid functionality of tablet/PC will be below $400. When Bay Trail is released, prices could drop even lower, to the $200-$400 range.

Mobile Strategy

The Atom processor architecture is central to Intel’s mobile strategy. Silvermont, which is the next generation for the atom architecture, is touted as delivering over five-fold reduction in power, with a three-fold improvement in performance. The architecture supports Microsoft’s (MSFT) Windows and Google’s (GOOG) Android operating systems. And Samsung’s (SSNLF:OTC) Galaxy Tab 3 will be powered by an atom processor.

Related Investments

Advanced Micro Devices, Inc. (AMD) and Hewlett Packard (HPQ) are two companies that rely on PC sales. AMD is diversifying away from this market by supplying chips to Playstation and Xbox consoles. Meanwhile Hewlett Packard is trying to grow market share in enterprise software, instead of waiting for the PC market to rebound.

Click on the image below to see stock prices over time. Price data sourced from Zacks Investment Research.

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Written by Chris Lau, Kapitall contributor. 

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