The PC Is Not Dead; Therefore Intel Is a Buy

I would like to recommend an investment in Intel (INTC) at the current price of ~$21.70 per share. Even though Intel is a mega cap stock, among the largest companies in the United States, I believe that conventional wisdom currently misunderstands the dynamics of the PC market and is therefore undervaluing Intel.

Currently INTC trades at 9.27x trailing earnings and ~9.8x analyst estimates for 2013 earnings. At these valuations, the stock is discounting low growth to moderate contraction in earnings over the long term.

Central to this investment thesis is that the transition to smartphones and tablets at the expense of traditional PCs is overstated. While it is likely that many new consumers will adopt smartphones and tablets, my argument is that these devices lack the functionality of a traditional PC and will therefore not displace the PC but instead supplement it.

While smartphones and tablets are extremely functional as mobile devices, there are inherent limitations to the device's size, operating system and processing power which protect the PC market from obsolescence. There are simply things that most consumers do not want to do on a smartphone or tablet, that they need a PC for. For example, this entire investment idea was written on a laptop.

I wouldn't even think to try to type a 500 word argument on a tablet because 1) there is no keyboard 2) the screen is too small 3) the operating system is limiting. The 3rd point is the most important because while the 1st two are fixable within the general framework of the current tablet architecture, the OS limitation is not fixable without turning to Intel as the primary solution provider. As long as one cannot switch seamlessly between programs, save documents to an easily accessible location, and other important tasks, a tablet or smartphone cannot be a workstation.

This investment thesis does not rely on Intel's ability to enter the smartphone and tablet markets; however, in recent years Intel has refocused its business to provide a compelling product for these markets. Intel has made significant strides to improve the power efficiency of its chips while maintaining computing power. Intel's newest generation of chips, branded "Ivy Bridge" are generally acknowledged to be at least two years ahead of their closest competitors in terms of computing power. Intel's newest generation of chips represents a real new technological advance that should help maintain their dominance in PC and server markets.

If Intel can successfully transition this technology into mobile markets, there is significant upside to the share price. While the investment thesis does not rely on this happening, at these prices, I view this as a free call option on Intel's ability to enter the mobile sphere.

With a 4% dividend yield Intel doesn't really need much growth to justify a purchase; however, I believe that there is still a fair amount of growth, not decline in the PC market on the horizon. Currently there are about 300m PCs sold per year worldwide. If one assumes that a PC depreciates over a five year period, this would imply that the installed base of PCs is somewhere around 1.5B worldwide.

Since there are nearly 7B people on the planet, there is still room for growth. If there were only one PC in every household, the installed base would be somewhere in the 2-3B range, a 30%-100% increase over the very long term. If Intel is able to continue selling chips for ~$200 per unit at 30% operating margins, the $108B market cap doesn't look that steep compared to that opportunity.