Are Better Days Ahead for Intel Shareholders?

Semiconductor giant Intel (NASDAQ: INTC) is in a difficult position. As the world’s biggest chip company, Intel grew into the behemoth it is today by capturing an ironclad grip over the personal computer industry.
Today, Intel is at a crossroads. Consumers are conducting a greater share of computing on mobile devices and smartphones. This has led to a startling decline for the PC. In fact, technology research firm IDC found that PC shipments fell 10.8% last quarter. This was even worse than the 9% decline analysts had expected.
Because Intel still derives nearly 60% of its annual revenue from PCs, this is a big challenge for the company. Fortunately, there are two business areas that could be meaningful growth catalysts for Intel going forward: data centers and the Internet of Things.

The Wave of Intel’s Future

Two key growth areas in technology right now are big data and device connectivity. Intel has significant businesses in both of these areas and is capitalizing on their growth. Intel grew revenue in data centers by 12% last quarter to a record $4.1 billion. Meanwhile, the Internet of Things business posted a solid 10% year-over-year revenue growth rate.
Data centers is Intel’s fastest-growing unit, and it is also the company’s most profitable business by far. Operating profit grew 9% in data centers last quarter, while operating profit in the Client Computing Group, which includes its PC and mobile operations, fell by 20%. Moreover, margins are outstanding in data centers: Intel realized a 51% operating margin in data centers, compared to a 28% margin for client computing and a 26% margin in the Internet of Things.
Growth in these areas should be complemented by Intel’s pending $16 billion acquisition of Altera (NASDAQ: ALTR), a major player in field-programmable gate arrays, or FPGAs, particularly in data centers.
The rapid growth in data centers and the Internet of Things couldn’t come at a more opportune time for Intel. Growth continues to slow in its core PC business, and the company has not made meaningful progress in mobile yet.
Revenue in Intel’s Client Computing group declined 10% through the first nine months of the year. This has caused Intel’s total revenue to decline 1% in that time. Margins in the Client Computing Group are declining as well. Intel is spending heavily to get its chips into as many tablets as possible. This has worked, in the sense that Intel shipped more than 40 million tablets last year.
The problem is that in order to gain this volume, Intel has had to make significant price concessions. This has caused contra-revenue, which has resulted in massive losses. Intel’s mobile business lost a whopping $4.2 billion last year. Management has vowed to improve profitability by $800 million this year, and the company remains on track to meet that goal. But even so, it is clear that Intel has a long way to go in mobile.

Intel Shareholders Get More Cash in Their Pockets

As a reflection of management’s confidence in the strategic direction of the company, Intel recently gave investors a dividend hike and raised its full-year forecast. The company increased its dividend by 8%, to $1.04 per share annualized.
At its current stock price, Intel’s new dividend represents a hefty 3% yield. That is a significantly higher yield than the S&P 500, which makes Intel an attractive stock pick for dividend investors. Its high yield helps compensate investors for the lack of earnings growth.
Intel’s data centers and Internet of Things businesses, which enjoy rapid growth and high margins, are helping to offset deterioration in PCs and mobile. These areas are largely the reason why Intel expects mid-single digit revenue growth in fiscal 2016. The cloud will play a major role in Intel’s growth; management expects cloud-driven growth to drive low-double-digit growth in data center revenue for the full year.
While progress in mobile and the PC remains to be seen, investors may want to think differently about Intel.

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