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Semiconductor giant Intel (NASDAQ: INTC) delivered first-quarter earnings that met analyst estimates. Investors responded positively and sent the stock up about 4% in early-market trading.
Still, while hitting quarterly targets is always a positive, there are longer-term questions that Intel’s earnings report did not answer.
First and foremost is how the company can grow without a strong environment for personal computers. Global PC shipments are in decline. As the world’s largest chip company, Intel depends heavily on the PC industry.
This poses a problem for the company. Intel met expectations this quarter, but quarterly revenue was flat year-over-year. This hardly seems like a cause for celebration.
To be sure, Intel does have two high-growth businesses in data centers and the Internet of Things (IoT). But unfortunately, these businesses still make up a relatively small portion of total revenue.
The key takeaway is that even though Intel’s earnings report showed strong growth in two of its key businesses, it continues to be weighed down by its large and slow-growth PC group, and that should remain a concern for investors going forward.
First, it should be mentioned that Intel’s growth engines are picking up steam. The company operates in a number of areas outside traditional PCs. Intel’s data centers and IoT businesses are growing at very high rates. This helped it meet quarterly estimates despite the harsh PC climate.
Revenue from data centers and IoT grew 19% and 11% year-over-year, respectively. The Internet of Things is a particularly interesting area – a new technology which has the power to connect virtually all devices. This is a breakthrough in connectivity that goes far beyond just the smartphone.
With IoT, mobile, home and embedded devices could all be connected to the Internet to integrate computing abilities and share data over the cloud. Intel is developing platforms across a wide range of industries, including retail, transportation and industrial, as well as for connecting devices within buildings and the home.
Intel estimates there are approximately 50 billion devices that could all be connected through the Internet of Things. And since the cost of Internet bandwidth has fallen by 40 times in the past decade, Intel has a major opportunity to be in front of the trend.
However, it’s hard to get overly excited about these new growth segments, because they are still overshadowed by Intel’s PC division. Its Client Computing group, which houses the core PC business, saw revenue decline by 8% year-over-year last quarter. This matters a great deal, because this business represents 57% of its total revenue.
The Client Computing group is the newly-formed operating segment that Intel created as part of its restructuring. This division combines the PC group and the mobile business, which the company used to report separately. Still, the fact that the Client Computing group is twice as large as its next business, and comprises a majority of total revenue, makes it hard for Intel to grow.
The global PC industry is in decline. Technology market research firm IDC stated that global PC shipments fell 2.4% in the fourth quarter last year. PC sales stood at 80.8 million units for the quarter, down from 82.2 million units the previous year.
Without a more supportive PC climate, it’s difficult to see Intel returning to growth. Indeed, Intel management itself expects flat revenue in 2015.
Intel is a cheap stock, perhaps a sign that the market understands its weak growth outlook. Shares of the company trade for just 14 times earnings and the stock pays a solid 3% dividend. Income investors should continue to view Intel positively because of its attractive dividend, but growth investors may want to look elsewhere.
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