PC stocks have taken a beating in 2016 as Intel’s (INTC, Financial) dim earnings report has propelled a widespread selloff. PC sales are slowing down, and it has had a negative impact on the stocks in the sector. While PC sales are expected to continue their downtrend, a few companies like NVIDIA (NVDA, Financial) have managed to grow.
Intel, on the other hand, has failed to offset this slowdown, and this may be the reason why the company’s struggle will intensify in the future.
Data Center Group fades out
Intel’s exposure to the weakening PC segment has been well documented. The company generated roughly 60% of its overall revenue from its PC Customer Group in the quarter ended Dec. 27, 2014. That number fell to 59% this quarter.
Intel observed that revenue from Data Center Group surged only 4% on a yearly basis. Macro weakness miffed enterprise demand and affected Data Center Group revenue to come in below management’s prior guidance. Fourth quarter of 2014 was the company’s sturdiest quarter as Data Center Group revenue escalated 20%. But this year, it seems like double-digit growth could be a thing of past.
The company relies on the fact that Data Center Group will carry on its double-digit growth in 2016 due to its cloud segment and by snatching additional share in the networking and telecommunication space. But if the slowdown continues in China and the developing market, macro flaw could carry on to act as a headwind for Data Center Group.
Commodity processor model
Recently the company tried to apply the commodity processor model in the market, perceiving that its primary smartphones rivals, such as Samsung (XKRX:000830, Financial), Apple (AAPL, Financial) and Huawei (SZSE:002502, Financial), use their personally designed custom chips in their smartphones.
The main problem with this is that there is no market for merchant silicon. Each and every smartphone seller will figure its own custom processors.
The premium part of the market is being shortened by the growth in the low-end and mid-range parts of the market in which it would make sense to put efforts to cultivate custom chips.
On the other hand, it should be clear that Intel can’t harness this opportunity since it does not vend smartphones, as it is a chip manufacturing company. Therefore, the commodity processor model is not feasible. Qualcomm’s (QCOM, Financial) chip business may go out of business at any time grounded on the same perceptive.
All in all, merchant chip business is only suitable for that company which can supply leading products at a decent cost structure, a thing that Intel failed to do in the mobile segment.
Conclusion
Intel has so far failed to offset the weakening demand of PCs. Weakness of the Data Center Group and a struggling mobile business means Intel’s struggle will likely continue. As a result, investors should avoid the stock until there’s a clear path to a turnaround.
