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Intel Keeps '18 View Despite Supply Concern, CapEx Up By $1B

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Intel Corporation (INTC - Free Report) has finally proven the rumors true by accepting its strained supply issues. Notably, Bob Swan, the company’s interim CEO, notified the status of the supply to customers and partners alike, in “an open letter”.

Swan is of the opinion that a stabilizing PC market has primarily led to the shortage. Nonetheless, in a bid to satiate the existing customers and the entities concerned, Swan reaffirmed Intel’srevenue outlook for fiscal 2018.

Swan believes the chip maker “will have at least the supply” required to match the outlook on the back of $15 billion investment in capital expenditure (CapEx) in 2018.

In this regard, Swan stated that the company is incurring an extra $1 billion in CapEx to boost 14nm manufacturing processes across Ireland, Israel, Arizona and Oregon facilities. In the near term, the chipmaker will give precedence to deliver high end Core and Xeon chips to customers.

Swan also confirmed the tight supply that the company is witnessing at the entry-level of the PC market. However, regarding 10nm processes, Swan believes supply is improving and expects to ramp up production in 2019.

Markedly, Intel expects revenues of almost $69.5 billion (+/- $1 billion) for 2018. The Zacks Consensus Estimate is pegged at $69.49 billion, representing year-over-year growth of 10.7%.

Following the news, the company’s shares were up 3.1%. Notably, Intel’s stock has returned 23.3% in the past year, compared with the industry’s rally of 31.9%.

PC Markets Showing an Upward Trend

After prolonged sluggishness, PC shipments reported solid growth in second-quarter 2018, according to latest data from two independent research firms — Gartner and International Data Corporation (“IDC”).

Preliminary data released by Gartner displayed that PC shipments in the second quarter were up 1.4% year over year to 62.1 million units. The IDC report stated that PC shipments increased 2.7% from the year-ago period to approximately 62.3 million units, surpassing its expectation of 0.3% increase.

Gartner called it “the first quarter of year-over-year global PC shipment growth since the first quarter of 2012.” IDC echoed the same sentiment saying that PC shipment “marks the strongest year-on-year growth rate in more than six years.”

Both the research firms believe that the improved PC shipment results were primarily driven by higher demand in business markets due to migration to Windows 10. However, per the data compiled by Gartner, weak demand for consumer PCs remained an drag.

However, Intel is aspiring to move beyond providing CPUs in a bid to enhance experience of the clients leveraging critical cloud and edge applications. We believe, exploring new end-markets will help the company expand its total addressable market (“TAM”).

Impact of Yield Issues

In the past month, Intel’s position in CPU market has been dwindling against that of AMD (AMD - Free Report) in particular, primarily owing to yield issues.

Per September market share estimates, Mindfactory revealed that AMD’s share rose 65% from August estimate of 50% of market share. Meanwhile, Intel’s share slumped 35% in September from 50% in August.

To Conclude

With the letter, Swan seems to have put the anxiety around Intel's PC CPU processors supply shortage to rest by not only acknowledging them but also giving a glimpse of how the chip maker intends to deal with the crisis.

Zacks Rank

Intel carries a Zacks Rank #3 (Hold). Inc (CRM - Free Report) and Aspen Technology, Inc. (AZPN - Free Report) , both sporting a Zacks Rank #1 (Strong Buy), are stocks worth considering in the same sector. You can see the complete list of today’s Zacks #1 Rank stocks here.

Salesforce and KLA-Tencor have a long-term earnings growth rate of 25% and 16.5%, respectively.

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