The Outlook for Intel Given a Surge in 2011 CapEx
Intel (NASDAQ:INTC) competes with AMD (NYSE:AMD) in the microprocessor business and with both AMD and Nvidia (NASDAQ:NVDA) in the graphics business. Based on trends implied in the company’s recent earnings released, we have raised our price estimate to $27.76. These trends include improving margins as well as high demand in the server business. The expected increase in capital expenditures is another key metric for investors to watch in the years ahead.
Intel anticipates a significant jump in capital expenditures during 2011, roughly 75% over the amount spent in 2010. The chart below, featured in Bloomberg, illustrates historic trends in capital expenditures for Intel. [1] Projected 2011 expenditures far outpace Intel’s typical levels, which should benefit chip-equipment makers like Applied Materials Inc., KLA-Tencor Corp., Novellus Systems Inc. and Varian Semiconductor Equipment Associates Inc.
Intel Capital Expenditure Data - Chart from Bloomberg
Why is the company spending so much in 2011? Below we explore these reasons and corresponding scenarios that could affect the company’s stock value.
22 nm Transition
Intel is expecting to transfer all chips belonging to categories including servers, notebooks, desktops and mobile devices to 22nm process technology. This process will warrant higher capital expenditures than its previous 32nm transition, when Intel had reused some of its 45nm technology equipment.
Further, while Intel previously transitioned its Atom and low-cost chips to 32nm process technology at roughly a one-year lag from its premium products, the 22nm process transition will occur in one sweep. [2] While the surge in cash outlay could prompt concerns from investors, we note that the move should create notable operational cost efficiencies.
The modifiable chart below highlights Intel’s stock value sensitivity to capital expenditures as a percent of sales revenue. We currently forecast a drop in this metric following a spike in 2011.
Expected Increase in Demand
Intel expects to see high demand for its 22nm chips. Besides the technology transition, Intel is also growing from the model of three high volume manufacturing fabs to four, necessitating further capital spending. The 22nm process technology should give Intel an advantage over its rival AMD and further strengthen its market position.
Intel has seen recent success in the server market and could use newer chips to sustain its dominant position. Rather than viewing tablets as a threat to PCs, the company anticipates increased data usage from tablets to drive demand for more and better servers. The modifiable chart below highlights Intel’s stock value sensitivity to changes in global server shipments.
Register to win a free iPad. Visit our home page at trefis.com for details.
You can see the complete the $27.76 Trefis price estimate for Intel’s stock here.
Notes:- Intel Sets Record Spending, Boosts Chip Equippers: Chart of the Day, Bloomberg, Jan 14 2011 [↩]
- Intel Expects a Lot from 22nm Fabrication Process, xbit labs, Jan 14 2011 [↩]