Why Analyst Sees Both Intel and Arm Winning With Big Opportunities

Last week, the brokerage firm Canaccord Genuity attended Computex 2015 in Taipei and held meetings with executives, notably from Intel Corp. (NASDAQ: INTC) and Arm Holdings PLC (NASDAQ: ARMH), as well as others across the personal computer (PC) supply chain. While the show was said to be less than impressive, and while some may lack enthusiasm, the analyst team at Canaccord Genuity sees opportunities for both processor players.

The optimism comes from the Windows 10 launch by Microsoft in late July and for new Skylake processors from Intel later this year. Another root of this optimism is a sentiment that the PC market should recover significantly following a weak first half. Accordingly, Canaccord Genuity touched on Intel and Arm.

The firm maintained a bullish view on Intel fundamentals, which it believes were highlighted by sustained foundry advantages and strong secular momentum supporting 15% or more Data Center Group (DCG) and around 20% Internet of Things Group growth potential. As a result, the firm reiterated a Buy rating and a $39 price target for Intel.

Canaccord Genuity’s Matthew Ramsay and Steven Lee detailed in their Intel report:

While we continue to anticipate an above seasonal second half given the launches of new Intel Skylake processors and Microsoft’s Windows 10, we are now modeling a 2015 PC revenue decline of 9% (down from 8%) versus Intel’s mid-single digit decline guidance. In fact, following our meetings across the supply chain in Taiwan, we lower our second quarter PC estimates from flat quarter over quarter to down 2% as inventory continues to decline.

We continue to anticipate a sharp snap back of PC sales in second half as the channel replenishes with Windows 10 systems; however, we believe Intel’s guidance sets an unrealistically high bar given the soft first half. That said; we believe strength in Intel’s other businesses — especially DCG — should still enable the company to achieve its overall flat revenue guidance for the year. With Lower second quarter PC numbers, our 2015 GAAP EPS estimate drops $0.02 to $2.16: our 2016 estimate is unchanged at $2.61.

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Meetings in Taiwan indicated that there was an increasing customer interest in Arm offerings. The firm believes that both the enterprise networking and server markets present attractive long-term royalty growth opportunities for Arm. In particular, the networking market has the potential that proprietary application-specific integrated circuits (ASICs) and chips based on MIPS and PowerPC will be consolidated onto ARMv8 and x86 going forward.

For a more concrete number, Canaccord Genuity believes that enterprise networking applications could generate Arm processor royalties of over $200 million by 2020 driving at least a 5% compound annual growth rate (CAGR) in terms of incremental royalty. All this considered, the firm reiterated a Buy rating with a $63 price target.

In the Arm report, the analysts detailed:

We believe softer near-term results from key partners MediaTek and Qualcomm will be offset by higher royalty/unit and stronger results from Apple, Samsung and Spreadtrum and remain confident in our 25% year over year royalty growth estimates for ARM. … Further, our supply chain meetings in Taiwan give us incrementally more confidence in long-term server and networking royalty opportunities. Finally, we believe the new long-term Mali graphics partnership signed with Samsung increases the chances recent graphics share gains are sustainable.

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Shares of Intel were down 0.7% Monday morning, at $31.60 on a 52-week trading range of $27.72 to $37.90. The stock has a consensus analyst price target of $34.64.

Shares of Arm were down 0.7% to $51.78. The consensus analyst price target is $60.42 and the 52-week trading range is $37.75 to $54.82.

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