Microsoft’s Gift to Intel

Today I had the chance to talk live on CNBC’s Squawk Box about INTC.

INTC – Enterprise Server Upgrade Cycle Supporting 2015 EPS Growth: With MSFT set to end support for Windows Server 2003 in July 2015, over 10mm server units may be up for refresh in 2015. As 2014 shipments for the entire Windows server market totaled 5.5mm units, this represents a significant growth driver for INTC as its Data Center Group is 25% of revenues. INTC management did indicate at the November 2014 analyst meeting that it is seeing server upgrade activity already unfolding in 2H14. As INTC’s PC segment gained in 2014 from MSFT ending support for Windows XP, investors are focused on the pending enterprise server upgrade cycle. With clients looking for productivity gains, expect INTC will realize pricing gains as more fully configured, virtualization-capable systems are specified.

INTC – After 2014 PC Upgrade Cycle, Will Consumer Demand Grow?: With INTC’s core PC business benefitting from the Windows XP phase-out driving +19% EPS growth in 2014, the question for 2015 is whether the PC market will provide growth given the weakness seen in the global economy (e.g. Europe, PRC). However, INTC should gain market share from competitors Samsung Electronics and Taiwan Semiconductor (TSM) as its success in mastering 3-D transistor production will allow it to better serve AAPL’s internal foundry needs, for example. Away from its manufacturing prowess, INTC may see positive trends in its PC segment continue should consumer households reallocate spending towards PC upgrades as gasoline and energy price declines free up disposable income. If so, then INTC has the opportunity to realize profits from its x86 Android tablet PC business as subsidies are reduced.

 INTC – After 2014 40% Rise In Share Price, Stock Attractive Going Into 4Q14 Report: Looking ahead to 2015, INTC EPS are forecast to grow +6% to $2.37, a marked deceleration from 2014’s +19% increase. That said, INTC should show solid 4Q14 financial performance (revs $14.7bn (+6% y/y), EPS $0.66 (+29% y/y)), so decelerating EPS will come later in 2015 perhaps as the last 3 years capital expenditures start to be depreciated and thus impact gross profit margins. Relative to its underlying 12% EPS compound growth rate, INTC shares are trading at a price-to-earnings growth (PEG) multiple of 1.35x, a relative fair valuation. Assuming 1.5x PEG multiple that mature technology companies can support, INTC shares should reach $40 over the next year, an +11% prospective gain. As such, INTC is still attractive to investors going into the 4Q14 EPS release set for Wed 1/15/15.