Friday, February 18, 2011

Intel: Hold! Says Piper; Buy! Says Credit Suisse

A couple of interesting notes out today on Intel (INTC) taking very different positions.

Piper Jaffray analyst Gus Richard, who has a Neutral rating on the stock, writes today that the personal computer is still a strong source of free cash flow for Intel, but is not going to bring it growth anytime soon.

Richard thinks Intel’s “Atom” chip for smartphones and tablets is “beginning to look like bungled product,” and that the company would be best suited pouring the cash from the PC business into the network infrastructure market, by finding ways to integrate programmable logic devices (PLDs) with its microprocessors.

Richard notes the arrival of Motorola Mobility’s (MMI) “Lapdock,” which was unveiled last month at the Consumer Electronics Show, but which was shown off again this week at Mobile World Congress in Barcelona.

If you haven’t seen it, the Lapdock is a shell that’s just a screen and keyboard hinged together, into which you can insert Moto’s “Atrix” phone, which is due out at the end of this month. At any rate, Richard’s point is that the Lapdock shows that mobile phones can be the new computing platform. “This paradigm devastates the x86 and Intel’s lock on the computing market,” writes Richard.

As for Atom, “We are confident the 22 nanometer version slated for 2012 will likely beat all ARM [Holdings (ARMH)] implementations in terms of power and processor performance,” writes Richard. “However, Atom currently lacks the ecosystem to be successful, and the 22-nanometer version may arrive too late to save Intel’s mobile effort.”

Richard sees two options for Intel: “One is to become a foundry for OEMs like Apple (AAPL), and the other is to buy Altera (ALTR), or Xilinx (XLNX).” On the latter of these, Richard opines, “A PLD/processor solution, in our view, will ultimately dominate all infrastructure markets where one chip is needed to support many markets as OEMs cannot afford to develop a chip for every market.”

On the other hand, Credit Suisse analyst Jonathan Pitzer today reiterates an Outperform rating on Intel shares and a $28 price target, after hosting a meeting with Intel’s management in London this week, and he rattles off a slew of positives.

Intel reiterated a “low teens growth rate” for personal computers this year, on a percentage basis, even though analysts have been skeptical.

Pitzer points out the first tablet using Android based on Intel’s processor is “on track” for release in the third quarter of this year, and that the company has 30 tablet “design wins.”

Moreover, the battle with ARM has been “one-dimensional” so far, he argues, with the focus strictly on ARM’s advantage in power consumption. This year, the battle will go 3D, with more talk of Intel’s performance advantage and its value in the “ecosystem.”

Writes Pitzer, “It’s not ASP per chip, but rev per wafer; its not product GM but incremental gross margin.”

As for Intel’s proposed $9 billion in capex, it won’t hurt profit this year, he insists. “all else equal, depreciation growth in 2011 and 2012 will impact gross margin by 100bps and 110bps respectively.”

But “all else is not equal, the ramp of 22nm will include moving chipsets from “N-1″ to “N” for the first time ever, significantly increasing INTC’s consumption of leading edge silicon, and moving chipsets reduces costs and INTC’s P&L is significantly more leveraged to cost reductions than price declines.”

Intel shares today are up 22 cents, or 1%, at $22.19.


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