Intel (INTC, Financial) is expected to release its third-quarter results after the market close on Tuesday.
Intel’s stock price has surged by more than 9% since the start of the year, pushing it near its 52-week high, and the trend might go on if Intel continues its turnaround story this year. After watching its sales numbers flatline due to declining PC sales since 2011, Intel’s top line grew by 4.8% in the first half of this year.
One of the primary factors for the turnaround was the growth in the datacenter segment, while the client computing group, whose health depends on the state of the PC world, only showed marginal decline. As the client computing group held its ground, the datacenter and IoT segments brought in the top line numbers, thus allowing Intel to post sales growth in the first six months of the current fiscal.
Intel knows that PC sales will never return to their glory days, and the company has been pushing hard to capture the growth in the Internet of Things and datacenter industries. At 16.67 times earnings, Intel looks fairly priced for the headwinds the company faces against one of its major revenue drivers, and the company still has a lot to prove in the two future revenue drivers it has identified.
Intel’s revenue has grown from $25.97 billion in the first six months of last year to $27.23 billion this year. As indicated earlier, the increase in the top line was due to the growth in datacenter and Internet of Things revenue. Fortunately, the expansion of these two segments was able to cover for the $70 million decline its client computing group experienced.
The client computing group's revenue has been on the decline as worldwide PC sales declined for the last four consecutive years. Unfortunately for Intel, PC sales could throw a huge wrench in the works as PC shipments around the world continued their decline this year. Gartner reported that PC shipments fell by 5.2% during the third quarter, making it the seventh consecutive quarter of sales decline, the longest in the history of the PC industry.
We have already moved toward a world in which we can live without a PC in our homes because our smartphones and tablets can take care of our daily Internet consumption needs. Just a quick look at the companies investing in mobile technologies versus desktop technologies will tell you the divide is becoming larger and larger by the day. Facebook (FB, Financial), for example, earns more than 85% of its advertising revenue from mobile, and that figure has been increasing each year.
Third-quarter results, as well the company’s guidance for the rest of the year, will play a huge role in sustaining the upward trend that Intel’s stock experienced since February. The new segments that Intel has identified for its future – datacenter and Internet of Things – are promising, but Intel has a long way to go before it can match its PC-based revenues. The IoT segment is still many years away from realizing its true potential, and datacenters is where the company can really expect some solid returns in the short to medium term.
Competition in the datacenter segment is heating up, but Intel’s long-term future is dependent on the growth of these revenues. As such, it will be the No. 1 metric I will watch during the earnings call.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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