Citigroup analyst Glen Yeung reiterates his Buy rating and $29 price target on Intel (INTC), citing channel checks that revealed strong demand for INTC’s Atom processor:
Field checks from Japan suggest Intel has ordered 20M Atom flip-chip packages for 3Q08 and 25M for 4Q08. This is orders of magnitude more than our modelled 2M and 2.5M units in that timeframe. These figures do sound aggressive to us (and some is likely inventory build) and so we believe a substantive haircut is appropriate. Nonetheless, even at half these levels, Atom is running well ahead of our expectations. We conclude that Intel’s relatively aggressive 8.8% 3Q08 revenue growth guidance, while still prone to macro factors, looks more achievable in light of Atom strength.
Yeung thinks that Atom strength will be augmented by strong demand for Netbook:
Netbook demand has been surprisingly strong. Since its launch, several OEM’s have launched Atom based netbooks including Dell, Lenovo, Asus, and Acer amongst others. Relative to 3rd party forecasts (as low as 400K from IDC, 8M from Gartner), we believe actual netbook demand has been stronger than expected, limited by Intel processor availability, and within this, Intel has seen limited competition.
What’s more, Yeung believes that cannibalization probably won’t be a big issue, especially since Atom processors have higher gross margins than the chip they replace:
While it is too early to be certain of any cannibalization, our analysis shows Atom most likely cannibalizes the Celeron 550. Atom carries higher GM than the 550 Celeron, given its much smaller die size, and we therefore do not view any cannibalization as necessarily negative for processor GM. We also note that at the levels of Atom we see, cannibalization would be nearly 80% of Celeron sales at its fullest extent. This is highly unlikely, suggesting that much of the Atom sales are new revenues.
Yeung’s bottom line:
Intel continues to be a leadership stock, supported by favourable mix trends, market share gains, good inventory management, and now a new product story. While prone to near-term macro issues, we nonetheless view Intel as a core holding longer-term. It remains a favoured name for 2009 along with QCOM, ALTR, and TXN.