Intel Corporation A Buy Despite A Cut In Price Target: BAML

Intel Corporation A Buy Despite A Cut In Price Target: BAML
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Bank of America Merrill Lynch analysts slashed their price target on Intel Corporation  shares, citing their reduced forecast for PC shipments in 2016. The research firm earlier forecasted the PC market to decline 5% this year, but now it has revised this number to 10%. The analysts believe the chip maker’s expansion in high-growth segments such as the cloud, memory, mobile, and IoT will offset the near-term pressures from the PC market, thus pushing the stock higher in the long run.

Intel Corporation  – Declining relevance of PCs

Intel is shifting its focus from the PC business, and the firm’s analysts believe the impact of the PC decline will fall on an annual basis. From 2011-14, the PC market accounted for 60-65% of Intel’s sales, but BAML expects the segment to form just 49% of the total revenue in the current year.

The firm estimates that the other segments such as data center and IoT will experience 10-15% growth in 2016 or account for a 45-48% share of total sales. It is expected that non-PC segments will command a 50-55% share of Intel’s total revenue in 2016-17, including the mobile expansion.

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BAML’s analysis of cloud capital expenditures across the industry suggests a 17% year-over-year (YoY) growth rate in 2016. It represents a massive improvement from the 7% YoY growth registered last year. Intel expects its cloud business to register revenue growth of 20% from 2016-2019 as more and more enterprises shift from private cloud to a mixed, public-private hybrid setup.

Intel Corporation  – Growth expectations from DCG

It’s expected that the products Intel’s Data Center Group (DCG) will release in the near future will help ramp up the performance of the segment. The Knights Landing processor for HP Corporation, the Broadwell server ramp, and 3D NAND flash memory are some of Intel’s upcoming products. Since 2011, DCG has produced a compound annual growth rate of 11%. Analysts believe the Broadwell server alone could give growth in the double digits.

ARM, Intel’s arch rival, will further intensify competition, but the analysts believe its growth in data centers will remain dull in comparison with Intel’s forecasted revenue of $16 billion to 20 billion in 2016-2019. Also it is expected that a large portion of Intel’s future growth will be derived from non-micro processing products.

Based on Intel’s long-term growth prospects, BAML analysts have reiterated their Buy rating on the chip maker. But owing to near-term PC headwinds, the analysts have lowered their price target from $40 to $36.

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