Why Intel Corporation Stock Could Yet Again Outperform in 2015

Shares of Intel Corporation  (NASDAQ: INTC  ) , the world's leading vendor of PC and server processors, have performed beautifully over the last year, up 32% year to date against a Nasdaq up just 7.08%. Can Intel stock deliver yet another year of outperformance during 2015? 

Mobile is ugly, creating opportunity
One of the most attractive features of the Intel story is the enormous potential that the company has ahead of it in mobile. As Apple's (NASDAQ: AAPL  ) iPad sales continue to decline while its Mac sales soar, it's looking as though the tablet computer is just another form factor of the PC and that the "traditional" PC market that Intel plays in -- notebooks and desktops -- isn't in terminal decline.

Assuming that Intel's traditional "PC" business is flat to slightly up over the long-term, the mobile business starts looking -- as it originally did -- like a great incremental opportunity for the company. With over 1 billion smartphones shipped last year and with just under 200 million tablets shipped, there's a lot of potential upside here if Intel can capture it. 

Not surprisingly, Intel is losing about $1 billion per quarter investing in this mobile opportunity (developing chips isn't cheap). These losses hurt in the near term, but will likely prove well worth it in the years ahead.

Intel's 2015 mobile plans in a nutshell
Intel should benefit from a number of mobile tailwinds next year. For starters, the contra-revenue program that Intel has in place for its tablet products will go away as products that do not require these subsidies hit the market by the end of 2014 and across 2015. 

Intel is also likely to benefit from the ramp of its stand-alone LTE-Advanced modems as well as its integrated applications processor and modem chips for low-cost smartphones. Finally, by the second half of the year, Intel is set to begin to ramp its first "hero device" worthy applications-processor platform known as Broxton (for both smartphones and tablets). 

What kind of loss will Intel incur in mobile next year?
Suppose that Intel can ramp from 40 million tablet chips shipped this year to about 70 million contra-revenue-free tablet chips. Further, assume that Intel can also ship roughly 50-100 million smartphone modems and applications processors. Under reasonable selling price assumptions ($15 for the tablet chips, $20 for the smartphone platforms), Intel's mobile division could drive north of $2 billion in mobile chip sales.

This would still generate a loss (the breakeven for this division is between $5.5 billion and $6.6 billion) of about $2.2 billion (assuming $2.25 billion in sales and 50% gross margins), but this is half of what the division is set to lose in 2014. 

Could the shares hit $40 next year?
Assuming that Intel can grow its datacenter group by low double digits in 2015 from 2014 levels, PC chip sales grow modestly, and mobile revenues grow significantly, it's not hard to see Intel doing between $58 and $60 billion in sales. 

At a gross margin profile of about 63% for 2015, coupled with operating expenses of $19.2 billion (flat to 2014) and a tax rate of 28%, net income of $12.5 billion and $13.3 billion seems reasonable. At 15 times those estimates, Intel could hit between $37 and $40 next year, potentially outperforming the market again. 

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