PC demand has always been a topic of debate and thorough analysis among investor circles and the recent reports from IDC citing an improvement in demand because of Windows XP migration and considerable commercial spending has only increased the scepticism around PC demand. One of the big beneficiaries of this development, Intel (INTC, Financial) reported an 8% y-o-y growth in revenue with a reasonable bottomline growth of approximately 5%. Let us analyse if this uptick in Intel’s earnings coupled with the opportunities in data center products and Internet of Things (IoT) make it a valuable buy.
Positive outlook for PC
After Apple released the iPad in 2010, it sparked a mobile revolution that led to a steady decline in PC demand thereby hurting the operations of PC makers and associated companies like Intel. While Intel is now optimistic about a sustainable PC demand, the big declines over the past couple of years did initiate massive changes at Intel. In order to combat the loss of revenue, the company embarked onto alternative markets with new platforms and secured remarkable design wins that enhanced its foothold in the semiconductor industry.
In the second quarter of 2014, Intel’s PC group earned a revenue of around $8.7 billion (up 6% from the year ago period) which is approximately 63% of its overall revenue. This implies that PCs still drive a good chunk of Intel’s business and hence, the improvement in the PC market is a relieving news for the investors. Additionally, the management believes that the stabilization in PC demand that has resulted from factors like PC refresh for installed bases of PCs that are four years old or older, form factor innovations, etc., will last throughout the year. Taking this positive change into account, the management has forecasted the midpoint of the revenue range at $14.4 billion, i.e., up 4% from the second quarter.
While Intel expects the enterprise PC business (forms two-fifths of its overall PC business) to stay in good momentum because of the above mentioned reasons, the consumer PC business looks comparatively tough for the chipmaker. However, investors can expect a better outlook in demand for PCs as the company caters to a wide range including the most powerful supercomputers to the smallest energy-efficient embedded machines.
The next big thing is here
Experts are claiming the Internet of Things computing phase as the next mega trend to hit the industry, estimating 50 billion connected devices by 2020 and worth around $7.1 trillion. Intel has not been unaware of this opportunity and has already begun developing its product portfolio in order to leverage from the opportunities. In fact the revenue growth in its Internet of Things segment is not only impressive but a strong indicator of the focus area that Intel should drive going ahead.
Intel has been aggressively expanding its portfolio of computing assets with the intent of making massive profits from the fast-growing IoT market. Currently, Intel boasts of a strong lineup of products and ecosystem solutions that will drive IoT projects. In the beginning of this year, the company highlighted the phenomenal capabilities of a chip called Quark that debuted in September last year and is approximately 10 times faster than the company’s previous Atom chip. Now, the other feature that makes this power-packed chip so significant in the IoT framework is its small size due to which it can be embedded into some of the daily use devices.
As per a recent news report, Intel is already working on the next-generation Quark that is codenamed “Dublin Bay” and even though no details are available on the new SoCs that the company is working on, it is a testimony to Intel’s credible focus on this opportunity.
Alongside the momentum building in Intel’s IoT division, its data center business continues to see strong growth on the back of building up of a big cloud business. In the second quarter, the data center group posted a growth of 19% y-o-y with platform volumes up 9% and average selling prices up 11%. The management expects that the data center division will continue to grow in low double digits because of the surging enterprise demand.
Takeaway
It can be agreed that Intel has not been quite successful in expanding its business into mobile and other communication devices. There is no defying the fact that Intel missed out on the early stages of mobile as a result of which it lost out a considerable share to its closest rival Qualcomm. However, Intel’s first 14 nanometer Broadwell Core M processor is expected to hit the markets in this holiday season; it is going to target the fanless, thin and light mobile systems. Therefore, investors could watch out for further developments in Intel’s mobile segment which could pick up with the launch of its Broadwell chips.
Besides the above mentioned growth drivers, another attractive reason that could draw you to Intel is its value generation capability. The recent dividend declaration of 22 cents per share has catapulted Intel’s dividend yield to 2.74%, comfortably ahead of Qualcomm’s yield of 2.31%. Additionally, Intel is still trading below its 52-week high of $34.83 thereby inviting investors looking for a valuable buy.
