It’s been a long time since the Intel Corporation (INTC, Financial) has given its shareholders anything to cheer about. After all, Intel might be a household name, but it’s no secret that the company has been suffering from reactionary management and insurmountable competition in its core PC market. Consequently, most of Intel’s quarterly results now generate little more than a scoff from fickle shareholders.
This week has proven no different.
On Thursday, Intel released a Q4 report that would have left most tech companies drooling. The world’s biggest semiconductor supplier posted revenues of $14.9 billion, an operating income of $4.3 billion, net income of $3.6 billion and an EPS of 74 cents. Intel also generated some $5.4 billion in cash from operations and paid dividends of $1.1 billion. Better yet, the company even had enough money left over to repurchase 17 million shares of its own stock.
Meanwhile, Intel’s full-year results skated past analyst expectations. Revenues hit $55.4 billion across FY2015 – with an operating income of $14 billion, net income of $11.4 billion and EPS of $2.33. Yet despite posting what many rational investors might call a roaring success, Intel's Q4 results actually caused shares to tumble by almost 5%. Why?
A lot of it has to do with Intel’s drowning PC business. After all, the company might have finished 2015 strong, but client computing revenue has dropped 8% year over year. Intel’s software revenues also fell by 2%. Bearing in mind these are two of the company's biggest earners, that's not very encouraging.
Yet the biggest source of bitterness among shareholders over the past few months has been the company's inability to find its way into the global mobile market. It can’t be denied that Intel’s mobile presence is currently negligible at best. Mobile-chip competitor Qualcomm (QCOM, Financial) has taken center stage thanks to its partnership with Samsung and a whole host of flashy Android products. No matter what Intel does, it simply can’t catch up – and that frightens investors.
It shouldn’t. In fact, none of it should.
First and foremost, let’s discount Intel’s losses in its PC division. CEO Brian Krzanich and his team have already made it crystal clear that the company is pulling out of this market (and thank goodness). In two years’ time, there probably won’t even be an Intel PC business for us to moan about. Likewise, it could be argued that Intel’s lack of interest in mobile isn’t because the company’s engineers are bumbling idiots. It’s because they’re trying to think bigger than handheld devices.
Just how big are we talking? By delving a bit deeper into the company’s Q4 results, the answer is pretty clear.
Intel’s PC and mobile divisions are undeniably dead weight; however, the company’s rapidly expanding Cloud business is starting to prove quite lucrative, indeed. Intel’s data center revenues have shot up by 11% since 2014, to $16 billion. Yet given time, the company’s sparkly new USP will likely become its thriving Internet of Things (IoT) division.
Across 2015, Intel’s IoT revenues shot up by 7%, hitting $2.3 billion. In Q4 alone, IoT brought in $625 worth of revenue. Okay, that doesn't sound like a whole lot of money when stacked against Intel’s Data Center income. But if the company plays its cards right, the potential is definitely there.
According to researchers at Gartner, the IoT market will generate some $235 billion in 2016, up 22% from 2015. Krzanich has made clear he isn’t prepared to let his company fall behind here in the same way Intel failed so miserably to connect with mobile customers. Consequently, so long as Intel’s IoT business continues along its current trajectory, it looks like the company is in the perfect position to win a lion's share of that rapidly expanding market. Fortunately, other segments of business are performing well enough to supplement the pricey R&D necessary to excel in this market.
Long story short: don't worry about Intel.
The company is betting big on IoT, its cloud business is growing rapidly and the C-level has finally admitted it’s time to give PCs the heave-ho. Things are actually going really well for once, and moaning about one or two minor setbacks won't change that. Shares very well may continue to fall in the coming weeks, sure – but in the long-term, Intel appears to have finally gotten itself back on track. Shrewd investors would do well to bear that in mind before they consider selling.
