Broader view: In conjunction with RBC’s broader Semiconductor Sector downgrade to Market Weight from Overweight, they are downgrading Intel Corporation (NASDAQ:INTC) to Sector Perform from Outperform. Their broader sector downgrade reflects the level of semiconductor internal inventories, which remain elevated as macro conditions do not appear set to make a material move higher or lower. Barclay’s view is that semiconductor growth rates have compressed to a level such that inventory cycles are not able to drive equity valuation outperformance. They believe that at this point in the cycle, it is prudent to rotate into wireless communications names exposed to winning platforms while reducing exposure to the PC ecosystem given their reduced unit demand forecasts.
RBC Perspective: They believe PC markets face near-term headwinds including:
1) macro uncertainly; 2) air pocket until Win8 refresh; 3) slower-than-expected ramp and subsequent adoption of ultrabooks; and 4) stronger-than-expected cannibalization in the tablet market. Longer-term, they suspect that terminal PC growth rates could moderate in the low-single-digits where content increases are not likely to offset slower unit growth expectation as a result of more feature-rich mobile devices. On the Data Center side, trends should remain strong as they forecast growth rates to increase from 11.1%/2012,12.0% /2013, 14.7%/2014 driven by incremental growth in cloud and HPC. Consequently, Intel Corporation (NASDAQ:INTC) should to reach its target of $20bil in Data Center sales by 2016, which implies a CAGR of 15% from 2011 levels of $10.2bil. They are leaving their estimates unchanged as their 2012 revenue growth assumption remains -1.8% Y/Y. They reduced their PC unit growth rate in 2012 and 2013. For 2012 they are reducing their PC unit growth to -2.8% (or 365mil units) from +2.0% (or 383mil units). For 2013 they are reducing their PC unit growth to flat (or 366mil units) from +7.7% (or 412mil units).
Valuation: Downgrade to Sector Perform (from Outperform), Average Risk rating and lower PT to $24.00 (from $28), applying a reduced 9.75x multiple (from 11.5x) to FTM GAAP EPS of $2.47.
Intel corporation closed at $23.15 a share, down approximately 1%.
(Disclosure: The author of this article has no position in any securities mentioned).