Intel Corporation (INTC) Won’t Be Hurt Too Much By Google’s Chips

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Following the recent newsflow about Google Inc (NASDAQ:GOOG)’s plans to design its own server chips using ARM architecture, analysts at UBS analyze impact of such a move on Intel Corporation (NASDAQ:INTC)’s sales. They estimate Intel’s sales to Google Inc (NASDAQ:GOOG) at 1.5% of its total as Google is a less than 10% customer of Intel Corporation (NASDAQ:INTC)’s Data Center Group which is ~22% of Intel’s sales. Assuming a 50% op margin, analysts estimate Intel’s sales to Google generate $0.05 in EPS.

But Intel already making semi-custom chips for key data center customers

Analysts believe this list of customers includes Google Inc (NASDAQ:GOOG), which owns an estimated 2% of the total installed datacenter capacity globally. Large cloud vendors which run at 90%+ utilization rate continue to look for a low power System-on-Chip (SoC) solution optimized for their custom workloads instead of an off-the-shelf Intel Corporation (NASDAQ:INTC) server chip, which they believe has led to some initial trials of the ARM-based chip. They estimate approximately 5% of Intel Corporation (NASDAQ:INTC)’s total sales in 2013 were to cloud vendors, which they expect to be targeted by the ARM-based server chip companies initially.

Expect ARM server newsflow to remain high as 28nm chips come to market

Analysts’ checks find that ARM-based server chips using 28nm process technology are expected to be released in 2014 from companies such as Calxeda, Advanced Micro, Cavium and Marvell. While they believe Intel Corporation (NASDAQ:INTC)’s expanded DCG offering including microservers remains strong, they expect some large data center vendors to trial 28nm ARM-based chips until Intel’s 14-nm chips hit the market in 2H14.

Valuation: Neutral rated, 12-month price target is $24

Intel’s PT is based on 11.7x firm’s 2015 EPS estimate of $2.05.

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