EUR 850.00 For Business Accounts Only

Morningstar | Out of Favor but Undervalued: Intel's Supply Update Should Assuage Concerns Over Chip Titan's Demise

On Sept. 28, Intel provided an update to address the recent reports of PC chip shortages that have been permeating the semiconductor space and causing concerns for investors in the wide-moat behemoth. In the release addressed to customers and partners, interim CEO Bob Swan noted that supply is especially tight in the entry-level PC market, as 2018 is probably set to be the first year of growth in the PC market since 2011, and Intel's vast manufacturing network has been prioritizing higher-value Xeon and Core processors that address the more lucrative data center and high-performance PC opportunities. Coupled with a resurgence in Advanced Micro Devices' competitiveness and Intel's well-publicized 10-nanometer delays, recent market sentiment has been scathing for Intel. Despite these concerns, we believe Intel's shares are very attractive relative to our unchanged fair value estimate of $65, as Swan reiterated the company's full-year revenue outlook for $69.5 billion, which is $4.5 billion above the guidance in January and implies 11% year-over-year growth. On the contrary, AMD's shares trade at a steep premium to our unchanged $9 fair value estimate.

We concede AMD is likely to capture some market share at the lower end of the performance spectrum in the PC market over subsequent quarters and server space in 2019. However, we continue to foresee Intel dominating the high end of these markets. Within PC, AMD's 7-nanometer offerings (made at TSMC) will be launched in 2019, probably only a few months before Intel. A limited number of Intel's 10-nanometer offerings (we believe Intel's 10-nm is more or less equal to TSMC's 7-nm in terms of transistor density) are already available. As Intel ramps up its 10-nm process throughout 2019, we don't foresee material share loss as implied by the current share prices of AMD and Intel.

Over half of Intel's Xeon volume shipped to cloud customers is customized to the unique workload run. Despite AMD's process node advantage (until Intel ports its server chips to the 10-nm node in 2020), we doubt AMD has the resources to develop customized chips for these cloud vendors and will probably be limited to lower-value opportunities. Furthermore, with founder partner GlobalFoundries shuttering its 7-nm efforts, AMD will depend on TSMC for all of its 7-nm products, which may be challenging as Apple, Nvidia, Xilinx, and Qualcomm are all larger customers that may receive precedence in their chip orders from TSMC.

Per the release, the firm increased its capital expenditure budget by about $1 billion for 2018, to $15 billion, with the incremental spending allocated to Intel's 14-nm capacity to respond to the greater-than-expected demand. While it will take some time to get this capacity on line, we assume Intel is converting some existing 14-nm capacity to 10-nm in preparation for the upcoming volume ramp in the newer technology, with the recent capex expansion serving as a backfill in capacity. Although this development benefits all major wafer fab equipment vendors, we think wide-moat KLA-Tencor is very well positioned with its leadership portfolio of process diagnostic and control tools and trades at an attractive discount to our fair value estimate of $128 per share. Wide-moat Applied Materials, narrow-moat Lam Research, and narrow-moat Tokyo Electron are also undervalued at current levels.

For more insight into our thoughts on Intel's efforts in the data center and AMD's competitiveness, please see our recent report, "Concerns Over the Demise of Intel's Data Center Leadership Are Overdone."