Where Will Intel Corporation (NASDAQ:INTC)’s Growth Come From?

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Intel Corporation (NASDAQ:INTC) posted disappointing data center revenue in 4Q2015, a business that investors are closely watching in the company. Data center revenue was up only 5% in the quarter, down from a growth of 12% in the previous quarter. For full-year 2015, data center revenue rose only 11%, slower than the more than 15% growth that the company officials anticipated for the year.

What next for Intel when its brightest spot appears to losing its luster? Well, Intel’s data center business may have shown weakness in the last quarter, but is there a cause for alarm? Among other things, this Intel analysis lays out the situation in Intel’s data center business and what the future holds. But first, a brief recap of Intel’s last quarter results.

4Q earnings highlight

Intel Corporation (NASDAQ:INTC) reported EPS of $0.74 on revenue of $14.9 billion in 4Q2015. Revenue rose 1% but profit decline 1% in the quarter. However, the results topped the consensus estimates that called for EPS of $0.63 on revenue of $14.8 billion.

The chart below depicts Intel’s revenue trend for the last five quarters:

Capture

1Q2016 guidance

Intel is looking for 1Q2016 revenue in the band of $14 to $14.1 billion after adjusting for certain items. The guidance is stronger than the consensus prediction of revenue of $13.89 billion.

Why data center will be Intel’s major growth driver

Intel Corporation (NASDAQ:INTC) controls 99% of the server market and it dominance of the market is partly supported by its leading processor technology and strong product portfolio. Additionally, the company has a history of solid execution.

Intel stands to benefit from multiple favorable secure trends in the data center business.

Data center opportunities:

The growing number of devices connecting to the Internet under the so-called Internet of Things initiative is sure to drive up the demand for data centers and given Intel position in the space with 99% share of the market, it stands to gain from the trend.

As smartphone penetration deepens in developing economies, operators in those markets will be seeking to upgrade or expand their data centers to enable them offer quality services to their customers. Intel stands to benefit from a rise in demand from data center arising from increased mobile data processing.

Additionally, Intel’s data center business stands to benefit from the rise of cloud computing. With the bulk of data processing and storage moving from the native device to cloud data centers, operators of such data centers will be looking to upgrade or add capacity to come with demand. That is sure to create a decent long-term revenue opportunity for Intel.

In 2015, Intel’s data center business grew 11% to generate $15.98 billion in revenue. But the growth was slower than the management anticipated for the year. Nevertheless, that should be viewed as a stumble but not a fall for Intel in the data center space. Intel enjoys high margins in its data center business.

Altera factor:

The acquisition of Altera is expected to unlock multiple revenue and profit opportunities for Intel Corporation (NASDAQ:INTC). One area that Intel stands to make significant gains courtesy of Altera is in the networking chips market, which is an $18 billion revenue opportunity. Not only will Altera broaden Intel’s portfolio of network-themed chips, but also pave way for the company to lock it customers and draw the interest of others with highly differentiated data center chips.

What about data center competition?

Qualcomm, Inc. (NASDAQ:QCOM) is trying to break into the data center space with the help of ARM Holdings PLC (ADR) (NASDAQ:ARMH) on one hand and Alphabet Inc (NASDAQ:GOOG) on the other. ARM is known for its inexpensive chip technology that it uses to undercut competition to broaden its install base. Qualcomm is working with it to undercut Intel in the data center market with low-cost server chips. On the other hand, Google is showing indications that it could adopt Qualcomm’s chips in its data centers.

Should Intel Corporation (NASDAQ:INTC) be worried as Qualcomm and ARM plot to take it one in the server market? The reason Intel has dominated the data center market for years is that it delivers superior performance. That explains why customers that have attempted to ditch its server products have found themselves coming back because they can find a provider that can successfully replace Intel in their data centers. For that reason, despite growing competition, Intel will likely maintain a lead in the data center space for many years to come.

Additionally, the fact that Intel continues to invest in data center product innovation should help it protect its share in the market. Management hinted at plans to boost data center focused R&D spending by over $1 billion in the period between 2014 and 2016.Such investment will not only enable Intel to expand its portfolio of data center products, but also differentiate its offering and raise the barriers to entryinto the market for rivals.

Memory business

There is an opportunity for Intel Corporation (NASDAQ:INTC) to drive meaningful incremental growth through its memory business. The company has in the past played a low price in the memory market but it is enhancing its play with innovative products and increased capacity.

Intel is working to make its first batch of 3D Xpoint-based memory products ready for launch in in the back half of 2016. Initially, Intel will produce 3D Xpoint in Utah at its joint venture fab with Micron Technology, Inc. (NASDAQ:MU).

Intel is also working on the upgrade of its Dalian memory factory in China from where it will initially produce 3D NAND products and later transfer some of 3D Xpoint production there. Upgrading the Dalian plant will cost Intel $1.5 billion, but company officials have also hinted that the long-term plan is to invest up to $5.5 billion in the facility over time. The 3D NAND products from the Dalian factory should be ready for shipment in 2H2016.

Beyond computers, Intel has a life

Intel Corporation (NASDAQ:INTC) is looking to other markets beyond the decaying PC market to fuel its growth in the coming years. The company launched Open Connectivity Foundation, which a kind of a club of likeminded companies that hope to create value and drive demand for IoT products. The members of this group include Intel’s chief rival Qualcomm, Samsung, Cisco Systems, Inc. (NASDAQ:CSCO), Microsoft Corporation (NASDAQ:MSFT) and Electrolux AB (ADR)(OTCMKTS:ELUXY) among others.

IoT is presently a nascent industry with massive opportunity once it grows big. IoT is promising to enable smart homes and others.

Intel has figured that in IoT and wearable tech market, energy efficiency supersedes performance. As such, the company is working on chips that consume less power and are also efficiency in power utilization so that it can impress manufacturers of such devices. Qualcomm is also driving towards the same with ARM-based chips that are famous for their energy efficiency.

Intel plotting for 5G opportunities

Intel is collaborating with a number of companies including Verizon Communications Inc. (NYSE:VZ), AT&T Inc. (NYSE:T), Ericsson (ADR) (NASDAQ:ERIC) and Huawei to develop and test 5G technologies. Intel doesn’t want to miss out of 5G as it missed out the LTE wave that saw Qualcomm jump over it in the mobile processor market.

In 5G, Intel sees opportunities beyond smartphones and tablets. The company believes that helping build 5G technology will enable to play a central role in the devices of the future.

Intel admits that attempting to go it alone cost it in the LTE and this time around the company is partnering with those that it believes understand the space well so that it doesn’t miss out of 5G opportunity.

Bottom-line

Data center business will be Intel Corporation (NASDAQ:INTC)’s growth engine in the coming years as the company stands to benefit from the explosion of devices connecting to the Internet in the Internet of Things and cloud dispensation. While there is still money to be made in the PC business, the market is shrinking. Intel’s other new businesses are promising but they are presently too small and grow too slowly to have a meaningful impact on the company’s near-term and medium-term growth.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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