Intel’s (INTC, Financial) client computing group, which makes chips that sit inside most of the personal computers around the world, accounted for nearly 54.22% of the company’s revenues for the past fiscal.
With PC sales declining around the world, Intel has doubled down on its efforts to get into the datacenter business and Internet of Things. But with more than half of every dollar Intel earns coming from the client computing group, Intel’s short- to medium-term fortunes are invariably tied up with this segment.
Worldwide PC sales
After growing from 239 million to the peak of 365.4 million shipments in 2011, global PC sales have been steadily declining over the last five years. According to Gartner (IT, Financial), the downward slide has continued well into this year with second-quarter shipments declining by 5.2%.
“Worldwide PC shipments totaled 64.3 million units in the second quarter of 2016, a 5.2% decline from the second quarter of 2015, according to preliminary results by Gartner Inc. This was the seventh consecutive quarter of PC shipment declines, but Gartner analysts said the market is showing some signs of improvement.” – Gartner
Much of the PC market’s troubles can be directly attributed to the growing influence of tablets and smartphones around the world. No longer do consumers rely on their desktops to connect to the Internet. Remember Microsoft’s (MSFT, Financial) plan to get a PC in every house? We have already reached a point where there is a smartphone in every hand. With iPads and other tablets gaining ground, the need for a personal computer has greatly reduced.
As tablets increase their efficiency, the slide is only going to increase. Although PCs will not vanish from our world that soon – most of us still need them at our workplace –Â PCs have to come behind smartphones, tablets and laptops. PC sales will decline to a particular level and then possibly stay at that level. We are yet to see the bottom of the market, as evidenced by the sales drop during this year.
“The PC market continues to struggle as we wait for replacements to accelerate, along with some return of spending from phones, tablets and other IT,” said Loren Loverde, vice president of International Data Corporation’s worldwide PC trackers and forecasting.
International Data Corporation forecasts global PC shipments will decline from 255.6 million this year to 249.5 million in 2020, a decline of 0.5% every year. If you notice, the company expects PC sales to stay above 250 million for at least the next three years.
Intel’s biggest bets
Although it will be extremely difficult for the desktop market to stay at that level indefinitely, it will be great news for Intel if that does happens. It will allow Intel, which controls nearly 80% of the PC chip market, to post reasonably stable revenues from this segment while allowing its thrust areas –Â datacenter and Internet of Things segments – to grow.
The datacenter group should be of interest to investors because even though it only grew 5% year over year to reach $4.027 billion, Intel posted a 43% operating margin for the segment with an operating income of $1.765 billion. IoT may be growing faster at the moment, but quarterly sales are still well under the billion-dollar mark.
With the fight against NVIDIA (NVDA, Financial) now elevated to the level of a full-scale attack, the company is well aware that it has to prove itself to the market. This is indicated by a 13x multiple on forward earnings and 3x on sales.
The outcome will take a few quarters to play out fully, but if there are any significant gains we should be able to see it in their datacenter and IoT growth during the next two quarters.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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