Intel Corporation Has Nowhere Else To Go But Down: Ascendiant

Intel Corporation Has Nowhere Else To Go But Down: Ascendiant
By The original uploader was VD64992 at English Wikipedia [Public domain], via Wikimedia Commons

Intel Corporation (NASDAQ:INTC) is struggling to gain traction in the tablet market as PC sales are falling. Ascendiant Capital Markets analysts Cody G. Acree and David Williams have initiated coverage of the chipmaker with a Sell rating and $20 price target. The analysts said that a shrinking PC market is not the only thing working against Intel. There are a number of factors. Let’s get into details.

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Intel Corporation (NASDAQ:INTC) still dominates the PC market. The computer market peaked in 2011, and has been declining consistently since then. According to recently published estimates by research firms Gartner and IDC, PC sales declined about 10% to 310 million units in 2013. The markets are hoping PC sales stabilize at mid-single digit levels.

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Intel Corporation (NASDAQ:INTC) has 84% share in the computer market. And PCs accounted for $33 billion or 62% of its total revenue in 2013. If PCs were a smaller segment of its business, the company could have been successful at offsetting the market headwind. Advanced Micro Devices, Inc. (NYSE:AMD) occupies the remaining 16% market share. Analysts say that AMD’s Accelerated Processing Units, which integrate a high-end graphics processor with the CPU, can potentially snatch a modest market share from Intel.

Intel faces tough competition in the server market

The Santa Clara-based company’s situation in the server market is quite similar. Intel Corporation (NASDAQ:INTC) enjoys 96% share in the server market. But the company may face challenges from ARM-based microservers. Intel knows that markets are increasingly turning to lower-power, high-density servers. The company has tried to address this issue with its Atom processors.

Intel argues that Atom can generate revenues and gross margins equivalent to its Xeon-based servers. But that seems unlikely because a lot of its rivals are working to deliver ARM-based alternatives, including Advanced Micro Devices, Inc. (NYSE:AMD) and Marvell Technology Group Ltd. (NASDAQ:MRVL) and several private companies. Intel Corporation (NASDAQ:INTC) would face more face more revenue and gross margin pressure due to the presence of many competent suppliers.

Intel Corporation (NASDAQ:INTC) has so far witnessed limited success in the tablet and smartphone markets. Despite billions of dollars of investment and a decade of effort, only a few products from Lenovo Group Limited (OTCMKTS:LNVGY) (HKG:0992), Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) and Asus are using Intel processors. Ascendiant Capital Markets says that even these deals appear to have been bought, rather than earned on the merits of its processors.

Intel faces gross margin pressure

Intel Corporation (NASDAQ:INTC)’s biggest competitive advantage has been its process and manufacturing leadership. The company has moved to 14nm node, and is currently pushing for 10nm, while most of its competitors are at 20nm. But this leadership has proven expensive. Over the past three years, Intel’s annual capital spending has been above $11 billion, more than double its $5.2 billion spending in 2010. Moreover, an increase in depreciation as a percentage of cost of goods sold and as a percentage of revenue has added to the company’s gross margin pressure.

Intel Corporation (NASDAQ:INTC) shares declined 0.36% to $24.75 at 9:34 AM EDT.

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