The PC market, which has been declining for two years, remained flat during the second quarter, giving Intel Corporation (INTC 4.13%) a huge boost. Intel raised its guidance on the back of strong demand for business PCs back in June, and the company managed to beat that guidance when it reported earnings in July. The stock surged to around $34 per share, more than a 50% premium to its 52-week low, as analyst upgrades rolled in. But with Intel's PC performance due mostly to stealing market share away from competitors like Advanced Micro Devices (AMD 1.31%), Intel's stock may be getting ahead of itself.
Strong sales, but now what?
Total PC chip unit volume rose 9% year-over-year during the second quarter for Intel, despite the fact that the global PC market was flat, according to Gartner. This suggests that Intel is picking up market share from AMD, especially at the low end, considering that Intel's average notebook chip selling price declined by 7% during the quarter. Of course, this is good news for Intel investors, but there's only so much market share to steal.
Intel suggested in its conference call that it expects strong demand for business PCs to continue through this year, but after that is anyone's guess. Intel sees signs of a PC refresh going on at small and medium businesses, no doubt driven in part by the end of support for Windows XP, but the consumer side of the market remains weak.
Gartner continues to predict that PC unit sales will decline this year, but it also expects a small amount of growth in 2015. Take these estimates with a grain of salt, but if they're anywhere close to accurate, then Intel's extremely strong quarter seems to be more of a blip than the start of a new trend. Growing PC profits going forward is going to be difficult, especially with much of Intel's unit growth during the second quarter coming from the low-end of the market.
Servers and mobile
Intel's two other main segments offer the company the opportunity to grow earnings, but both come with caveats. Intel's data center revenue jumped 19%, with segment operating income rising nearly 40%, and the company has guided for low double-digit growth going forward in the past. AMD plans to attempt to take back some of the server market share it has lost to Intel over the past few years when it launches ARM-based server chips later this year, and while the company faces an uphill battle, Intel may need to lower prices in order to battle the threat.
Intel's mobile division is currently losing billions of dollars per year as Intel subsidizes its tablet chips in an effort to gain market share, but these losses will narrow as this subsidization winds down. Intel will need to win a substantial portion of both the tablet and smart phone markets to break even, but at the very least the losses should moderate going forward. If Intel can manage to bring the segment to break-even over the next few years, it would erase the $3 billion-4 billion in operating losses currently plaguing the segment.
Intel now trades at roughly 18 times last year's earnings and 16 times the average analyst estimate for earnings in 2014. While a company like Intel, with vast competitive advantages, deserves a premium multiple, it's difficult to pay that much for a company that is still heavily dependent on the PC market. Intel was a steal in the low-20s last year, but with both optimism and the stock price at decade highs, shares of Intel look pricey.
The bottom line
Substantial earnings growth going forward for Intel will be made more difficult by continuing PC weakness and new competition in the server market. Share buybacks will certainly help boost per-share numbers, but at 16 times forward earnings, Intel is no longer undervalued, despite the recent flurry of analyst price target hikes.
