Apple 12-inch Enterprise iPad Hybrid to Challenge Intel, Predicts Evercore|
Evercore Partners‘s Patrick Wang today writes that he expects the Philadelphia Semiconductor Index to underperform the broader indices this year, with Intel (INTC) perhaps suffering some setbacks in its data center business selling chips into servers, but making progress in sales of “baseband” wireless chips against Qualcomm, among a slew of predictions for the new year.
Wang writes that “After a phenomenal +40% in 2013, the SOX underperforms and settles into the 475 – 500 range.”
“We see the modest EPS growth and extended valuation gap closing.”
Among several events for Intel, whose shares Wang rates Underperform, with a $20 price target, the company will face a challenge from a 12-inch iPad/hybrid computer from Apple (AAPL), Wang predicts:
Arriving in fall ‘14, Apple goes Enterprise with an 12” iPad. Powered by the A8 chip (perhaps 4C), this expands ARM’s reach and, once again, transforms the traditional notebook market as we know it. Expect a 2-1 hybrid – think iPad + MBA – similar to how most iPads are used in the workplace and in the same spirit of MSFT’s Surface. We discussed A7 in detail, the benefits of 64b, and why it makes sense in our note. Two obstacles: (1) Microsoft Office not just Office 365 and (2) local storage. This would hit Intel in an area of strength – enterprise NBs – and open up the monopoly to price competition, a common theme for Intel in 2014.
Wang’s point is that the Intel CPU “represents a significant portion” of the cost of a laptop, such as Apple’s MacBook Air. He shows a comparison of what he estimates are costs for the Air versus an iPad, which uses Apple’s own A-series processors:
Among other challenges to Intel, servers running chips using the ARM Holdings (ARMH) intellectual property will start to see some large deployments in cloud computing, eating into Intel’s franchise:
2015 will be the “Year of ARM Server” but we expect initial shipments and deployments this year. ARM SOCs could represent >10% of server chips on a run-rate in 4Q14 [...] Next potential catalysts: Open Compute Summit in January, Computex in June [...] INTC DCG profitability begins to show cracks and may even start contracting. To better address the Cloud, INTC may launch a new set of SKUs (tweener of Atom / Xeon). See #2. INTC faces a catch 22: (1) lose share and maintain margins / ASPs or (2) maintain share with lower ASPs / margins. This marks the first time since mid-2000s they’ve faced formidable competition in server. Over that period, share and ASPs have gone up 1000bp and $150 (or 5% CAGR), respectively, as Intel enjoyed a monopoly. It only gets tougher ahead. Pricing power has swung from the supplier to the customer as cloud providers (GOOG, AMZN, FB) are able to buy cheaper white box servers (direct ODM, Tier 2 OEMs), forcing INTC to customize and adapt to their needs.
At the same time, though, Intel will score some more customers for its manufacturing services beyond Altera (ALTR), which could include Apple, Cisco Systems (CSCO), Qualcomm,Broadcom (BRCM), and Nvidia (NVDA), he opines. Of those, Cisco, Broadcom and Nvidia seem to him the most viable.
Qualcomm faces incursions into its dominant baseband franchise, from Intel and many others. But he thinks it may be a make-or-break year for Broadcom, whose shares he rates Overweight:
Win: BRCM executes on LTE and LTE-A while successfully integrating connectivity. They ramp a handful of low-end and mid-range smartphones in addition to the Samsung design win. Lose: If unsuccessful, we estimate an exit would reduce op-ex by at least $320mn – adding 30c to earnings power.
Nvidia may follow the route of Texas Instruments (TXN), abandoning some of the battle for its Tegra mobile processor in smartphones and tablets to instead focus on automotive and embedded applications:
T4i delivers an integrated modem but lacks connectivity solutions,
relegating Tegra solutions to the shrinking merchant high-end market.
o NVDA’s GPU has not provided enough differentiation against other chips using ARMH and IMG graphics. We see the decision to license the GPU as a failsafe plan. We like the auto / embedded business and think $450mn in sales by 2016 (current: 25% of Tegra) is achievable.
He rates Nvidia stock Underweight, but raised his price target to $13 from $12.
Wang lowered his rating on Intersil (ISIL) shares to Underweight from Equal Weight, while keeping intact a $9 price target. He’s waiting for “signs of structural improvement” in the second half of this year, and at the moment thinks investors are betting too heavily on a turn-around in PCs boosting Intersil’s fortunes: “Historically ~25%, ISIL’s PC exposure is sub-20% now so investors may be overestimating the benefit. Importantly, the PC segment is forecast to decline to ~$20mn / Q by mid-14 from the ~$30mn level today.”
He also reiterates an Overweight rating on shares of Monolithic Power Systems (MPWR), and raises his price target to $40 from $36, writing that it “remains the best organic growth story in analog [chips] and should deliver over 2x analog peer growth in 2014.”
By: Tiernan Ray
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