Nomura Dishes Key Insights on Intel (INTC) Following Meeting with CEO Brian Krzanich

Nomura's Romit Shah dives into Intel's market prospects, from server share threats to yielding 10nm following a meeting with management.

It’s been a solid year to be an Intel (NASDAQ:INTC) investors, with the stock on an over 50% ramp throughout the last 12 months. The chip giant has been outclassing the S&P’s 14% rise in the same period, and Nomura analyst Romit Shah is taking notice. The analyst bats for the bulls on Intel’s prospects, especially following a meeting with CEO Brian Krzanich.

In reaction, the analyst reiterates a Buy rating on INTC stock with a $60 price target, which implies a 10% upside from current levels. (To watch Shah’s track record, click here)

This stock has certainly benefited from a powerful one-two punch of positive estimate revisions coupled with multiple expansion. However, is multiple expansion set to continue as strong, or is the weight on Intel’s revisions to generate sustained outclasses ahead?

Notably the Street’s EPS for this year has jumped around 30% from $2.97 up to $3.84. “That said, we came away from a meeting with CEO Brian Krzanich last week believing that the burden is on revisions to drive continued outperformance; we are less confident about further multiple expansion,” explains Shah, who found Intel’s CEO was blunt in admitting his company would forfeit server share to rival AMD in the back half of 2018.

The analyst acknowledges that this expected server share loss does not come as a surprise: “This wasn’t new news, but we thought it was interesting that Mr. Krzanich did not draw a firm line in the sand as it relates to AMD’s potential gains in servers; he only indicated that it was Intel’s job to not let AMD capture 15-20% market share.”

“We see Mr. Krzanich’s posture here reflecting the company’s inability thus far to sufficiently yield 10nm for volume production while AMD’s partner TSMC is currently making good progress on 7nm; thus, setting Intel up for stiff competition again in 2019,” highlights Shah, who believes “aggressive” expectations for transistor scaling have acted as a leading reason for 10nm’s “late” entry to the market. In other words, “Intel underestimated the complexity of manufacturing on 10nm,” notes the analyst. Intel’s leader hinted at better 10nm yields at play, but while progress is in action, they also “are not there yet,” with Shah highlighting a boost in 10nm today as less than ideal for gross margin.

Shah believes, “That said, Mr. Krzanich countered 10nm questions by saying that customers don’t care about density, they care about performance.” Between a combination of better process coupled with alterations in 14nm design, the chip giant has served up a just under 70% improvement in system-level performance. Krzanich likewise underscored Intel continues to look at performance improvements for an additional year on 14nm- a response that comes across to Shah as “naturally […] convenient for a company struggling on 10nm.” Yet, when sizing up the Datacenter Group’s lift in average selling prices (ASP) to the tune of 7% year-over-year, marking a sixth consecutive quarter in the first quarter that saw these ASPs jump, one encouraging point becomes clear to Shah: “it does seem true that Intel is finding new ways to add performance and getting paid for it.”

Down the line, Intel’s leader shines light on heterogenous computing along with advanced packaging technologies that longer-term stand to raise the company’s overall dollar content in the Datacenter. Bigger picture, the analyst commends a “paradigm shift toward heterogenous computing” that it appears “Intel is embracing.”

TipRanks indicates INTC has magnetized a fair amount of bullish attention on Wall Street. Out of 32 analysts polled in the last 3 months, 20 are bullish on the chip giant, 10 play it safe on the sidelines, while just 2 run for the hills. With a return potential of 10%, the stock’s consensus target price stands at $60.00.


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