These Chip Makers Have Upside Despite Double-Digit PC Slump

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

International Data Corporation (IDC) provided another somber outlook for the personal-computing market. IDC forecast quarterly shipments to drop 11.7% starting from May. The net growth for 2013 will be 7.8%. With such a negative outlook, are any PC suppliers and builders a good investment? Thankfully, a number of chip suppliers lowered their reliance on the PC market for sales, unlike PC makers such as Dell or HP. There are four chip makers whose shares still have potential upside despite a forecast for lower computer sales.

Memory supplier benefits

Micron Technology (NASDAQ: MU) shares are already up 126% year-to-date. Weaker PC sales would hurt DRAM demand, but Micron could simply shift its chip production away from PC markets and toward mobile devices. More upside remains if Micron capitalizes on higher sales in markets outside of the PC sector.

Micron is already shifting DRAM production to NAND. Earlier this year, the company introduced the smallest 128-Gigabyte flash device that is made using just 20-nanometer process technology. NAND is used in removable storage devices like USB drives and flash drives. The market is expected to grow by 35% this year.

Micron acquired bankrupt firm Elpida to increase its capacity. Some of the capacity may be shifted for mobile DRAM production.

Laptop processors improve

When Intel (NASDAQ: INTC) debuted its Haswell processor at Apple’s Worldwide Developers Conference, the company showed once again that it could offer more processing power with lower power consumption. Apple said that its 11-inch MacBook air will now have nine hours of battery life compared to five hours on the last model. The 13-inch MacBook Air will have 12 hours compared to seven hours on the previous model.

Intel’s strategy is to demonstrate that it can design chips that will help laptops compete more effectively against tablets. Strong Apple tablet sales are thought to be one of the main reasons PC laptop sales are struggling.

Haswell also has an updated graphics chipset, the HD 5000. Apple claims that the graphics performance will be a 40% improvement over the previous model.

Graphics-chip makers

When PC sales slump, NVIDIA (NASDAQ: NVDA) and Advanced Micro Devices (NYSE: AMD) are often viewed by investors as being at a disadvantage. This time might be different for both companies. AMD, a processor and graphics-chip supplier for the PC, is diversifying away from the sector. AMD is the supplier for Microsoft’s upcoming Xbox One and for Sony’s PlayStation 4. 

For the current quarter, AMD forecasts gross margins to be in the 39% range. In comparison, Intel reported gross margins of 56% in its quarter. AMD should be expected to improve its profitability. The company is containing costs, and much of the operating expenses took place in the first half of the year for product development. Restructuring is largely complete, and new products will be released in the second half of this year.

NVIDIA is another graphics-chip supplier for the PC market, and constantly grows sales for this segment even when PC sales are declining. NVIDIA spent the last few years increasing mobile processor sales with its Tegra line-up. NVIDIA Shield is a new initiative for the company. Shield is an Android-based handheld game console that was due up for launch, but will be delayed by one month.

Last quarter, NVDIA earned $77.9 million per share on sales of $954.7 million. Analysts had expected revenue of $940.6 million. Looking ahead, Tegra 5 (codenamed “Logan”) will be a big game changer for NVIDIA in the mobile space. Tegra 5 will benefit from research from Project Denver. The project’s initiative is to produce 64-bit chips that combine GPU and CPU functions.

Company share performance: 1 year

<img alt="" src="http://media.ycharts.com/charts/f57479f39d5705906b129a02657c4b6f.png" />

NVDA data by YCharts

Foolish bottom line

Chip makers recognized long ago that PC sales are in a chronic decline. The segment still represents a large portion of sales, but the companies are all growing their percentage of sales in hot areas such as mobile devices and game consoles. This is good for investors, because it ensures that growth will continue, while the underlying revenue from the PC market continues to come in. In the off-chance that Windows 8.1 spurs sales in PCs, then the chip makers will have an even better year than expected.

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Chris Lau has no position in any stocks mentioned. The Motley Fool recommends Intel and NVIDIA. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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