In its investor day presentation of November 20, Intel (INTC, Financial) shared a couple of updates across the various segments the tech giant operates in, but the bulk of the information it shared was of the data center group which appears to be the highly promising area for the later years. In fact, during the presentation, the management were upbeat on the growth of this segment which has been estimated to grow at a compounded annual growth rate of 15% in the coming four years. Let’s spend some time in understanding what got shared on the prospects of this business segment during the web conference, and how it remains the most enterprising segment for Intel in the years to come.
Data center segment has umpteen growth opportunities
Intel projects the growth in this segment of business mainly through opportunities in four key areas – Enterprise IT, Tech computing, Public Cloud and Telecom services. Enterprise IT comprises private servers for banks, governments, etc. which are data sensitive industries that require server performance within premises, tech computing domain refers to universities or businesses which require super-computers to calculate complex stuff while public cloud refers to websites which hold a lot of vital information on websites and outsource infrastructure to third parties such as Amazon (AMZN, Financial) Web Services, Microsoft (MSFT, Financial) Azure and IBM’s (IBM, Financial) Cloud. Telecom services pertain to content delivery networks and servers that store data closer to broadband households, so that the amount of data delivered across longer stretches remains confined to specific limits.
In brief, Intel expects computing needs to outpace the rate at which Intel is able to drive incremental performance by making advancements in the CPU architecture. Intel illustrates that while system costs have continuously declined, the amount of server units shipped has correspondingly increased with the passage of time.
Also Intel referred of Jevons Paradox during the presentation according to which lower pricing should optimize the number of units sold, meaning, if prices are kept low, total sales volume in units will surpass the amount of revenue lost and will finally make up for the revenue lost through more purchases at the customer’s end. However, given the performance gap between Intel and Advanced Micro Devices (AMD, Financial) prices of their respective product range, the number of opportunities to improve unit pricing might be limited going forward for Intel.
Intel suggests that within 2015, it will use architectural improvements to drive performance and have higher yields at the 14nm node. Thus, Intel foresees ample growth opportunities in the CPU serve space in the next few years.
Intel’s SSDs to act as a growth stimulant
Besides the server CPUs serving as a growth driver for the company, Intel’s SSDs could also contribute immensely to the rise in both revenue and earnings. Presently Intel’s market share in SSD shipments to data centers stands at 29%.
Intel’s revenue from SSD drives is estimated to be $2 billion this fiscal year while the total industry revenue from SSD drives is estimated to be $12 billion. However, SSD drives popularity is still limited as there are cost constraints linked to its making and there is lack of memory density per square inch in SSD drives. But Intel is not a company to be left brooding over something it cannot modify with time. In fact, the tech major is creating the 3D NAND, in which memory is stacked up to 32 layers, which addresses the constraints of this device easily.
If Intel is successful in enhancing the memory space to a multi-terabyte range, the growth in this segment would be clearly driven by two high-margin products – CPUs and hard drives. As disk-based storage units will be replaced with SSDs eventually, Intel looks well-positioned in the two verticals that would make excellent profit margins for the company.
Going further ahead
As Intel has always emerged the tech leader, an increasing market share and cross selling opportunities between CPUs and SSDs will give the data center group the potential to generate phenomenal sales and maybe the company’s projection of 15% revenue growth through 2018 could come true. In this fiscal year, Intel projects the data center group to generate total revenue of $14.1 billion on which if the 15% growth rate is applied through 2018, this segment might generate revenue of over $24 billion by FY2018. Also the management expects that the data center segment’s growth will aid in achieving a much better bottom line for the company. So, Intel currently seems to be on a fast-track growth trajectory overseeing ample opportunities in the technology arena which can take the company to newer heights in the near future.
