Credit Suisse detailed comments on INTC. $30 price target.
Bottom Line. We continue to believe investors under-appreciate INTC's server opportunity - 48% OpM versus corporate average of 35%. We see 3 growth drivers for the business: (1) Cyclical recovery in Servers, (2) INTC's increasing % of server BOM, and (3) x86 TAM expansion into higher-end unix servers. We are currently estimating EPS from servers of $0.41 in 2010 and $0.44 in 2011 -under a more robust but still reasonable scenario we believe that could be $0.53 and $0.62 respectively. Combined with our positive view on global PC penetration and cyclical recovery in corporate PCs, servers provide significant cushion to our $2+ earnings power this cycle. ■ Cyclical Recovery. Significant pent-up demand for servers exists in 2010. In 2009, server units fell 17% with peak-trough decline of 30%. In the 2001 downturn, units actually grew 2% (after growing 26% in 2000), with a peaktrough decline of only 12%. If units were to return to 2008 levels growth would be 19%, versus our current hardware team forecast of 13%. ■ Capturing more of the Value. Nehalem power/performance is driving significant ROI at the enterprise level. Our analysis suggests a conservative 6 qtr ROI, with 80% annual operating savings. High ROI should lead to INTC capturing more value – Server ASPs grew 11% in 2009 and MPU as % of server revs increased from <20% in 2007 to 25% in 2009. We see potential for further increase to 30% or higher. A refresh of the 50m unit server MPU installed base could represent as much as $4bn in incremental revs and 30 cents in EPS over the next 2 years. ■ Expanding TAM. x86 servers represent 93% of servers, but only 58% of server revenues. Nehalem should allow INTC to address more of the Unix market, especially with the 1Q launch of Neham EX - with ASPs of $1,400-$1,800 vs. overall server ASPs of $520. We believe Nehalem EX could expand INTC server TAM from $7bn to $10bn. Unix consolidation is second only to virtualization among IT manager priorities as it provides significant cost savings. The incremental $3.5bn in TAM could equate to 25 cents in EPS. ■ Reiterate OP. Our $30 PT represents a 15x P/E multiple to our $2.00 earnings power est. for this cycle.