Morgan Stanley Is 'Increasingly Bullish' On The Server Cycle (And Intel Could Benefit)

Joseph Moore of Morgan Stanley commented in a note on Wednesday that his hardware analyst team is raising their server estimates from up 8 percent to up 10 percent, partially due to the Microsoft Corporation MSFT Windows Server 2003 due to support expiration in July 2015.

According to Moore, Intel Corporation INTC will be the largest beneficiary as the company has already given a bullish guidance for its Data Center Group (represents 25 percent of revenues) during its analyst presentation in November.

“Intel has somewhat downplayed the Win 2003 effect as the primary driver of this strength, saying they have already seen that activity in 2H14, and that multiple aging win 2003 servers can be replaced by a single modern server,” Moore wrote. The analyst adds that “with good pricing power” and some gains within storage and networking, Intel's segment will remain “robust.”

However, Moore does note that he is still cautious on Intel due to gross margin pressures. The analyst explains that almost 30 percent of the last three years capital spending at Intel has been allocated to the construction in progress line and has not yet started to depreciate.

Finally, Moore notes that shares of Intel are trading at a premium “for potential optionality” in foundry, tablets and smartphones. The analyst believes that Intel will see “limited improvement” in these businesses. As such, an Underweight rating with an unchanged $30 price target is justified.

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