Last month, Intel (Nasdaq: INTC ) cited emerging markets as a key reason for its better-than-expected earnings and outlook. According to management, market researchers IDC and Gartner undercount emerging-market PC sales. That's understandable: Unbranded PCs garner greater market share in emerging markets.
Intel also said Brazil -- the "B" in the popular BRIC acronym -- is on track to become the third-largest PC market. With growth slowing in China, could Brazil be the engine that keeps the PC market -- and Intel -- going?
Not so fast
Growth in Brazil appears to be decelerating. The yield curve in Brazil recently inverted, a signal that investors fear that the economy will slow. In June, Brazil's industrial production fell a surprisingly large 1.6% from May. On Aug. 2, the government announced a slew of actions meant to counter that outcome, including an attack on "unfair" imports and a protectionist "Buy Brazil" policy for government purchases. At the same time, the country is having trouble containing rising inflation that reduces its purchasing power.
How did it come to this? Capital inflows chasing once-strong growth and high interest rates sent Brazil's currency, the real, up by more than 12% versus the U.S. dollar over the past year. That has driven up the cost of Brazilian exports, hurting demand for Brazilian products. (At least the strong currency effectively reduces the cost of imported products, such as Intel chips.) A rigid labor market and infrastructure bottlenecks contribute to stubbornly high interest rates.
High-tech versus just tech
Last month, your Foolish servant noted that emerging markets are separating high-tech from just tech companies, a plus for Intel compared with some other tech companies. Truly high-tech offerings can't be designed or built in a garage. Examples include chips from Intel and Advanced Micro Devices (NYSE: AMD ) , hard drives from Western Digital (NYSE: WDC ) and Seagate (Nasdaq: STX ) , and semiconductor foundry services from Taiwan Semiconductor (NYSE: TSM ) . In contrast, Dell (Nasdaq: DELL ) and Hewlett-Packard (NYSE: HPQ ) compete with locals that can assemble a PC in a shack.
Emerging markets and cloud-data centers have contributed to Intel's earnings growth even as PC growth slows. The company is a market leader, with a 9.5 P/E ratio and a whopping 3.9% dividend yield, At that valuation, the stock could handsomely reward investors. But slowing growth in BRIC countries such as Brazil and China threaten to take some bloom off the emerging-markets rose. Investors who wait for that to become evident may be able to get into the stock at an even better valuation.
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