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Intel (INTC): Where the Future Lies
By: Chris Ciaccia
Intel (INTC) missing the game on smartphones and tablets is nothing new. With the company announcing Brian Krzanich, as its new CEO, as Paul Otellini gets set to step down May 16th, the company is looking for a new direction and a new leader to take it firmly into the 21st century. The company's data center business could be a huge part of that transition.
When Intel reported first-quarter earnings two weeks ago, the company showed just how bad the PC market really is. Revenue from Intel's PC Client Group fell 6% year-over-year to $8 billion, but its Data Center Group segment actually saw revenue rise 7.5% year-over-year to $2.6 billion.
Intel has long been thought of part of a PC duopoly with Microsoft (MSFT), known as "Wintel," for the companies' dominance in the PC market. The PC market is contracting faster than anyone thought, according to the latest data from research firm IDC. Tablets such as Apple's (AAPL) iPad, and Google (GOOG) Nexus 7 and other Android-based tablets are increasingly being used for computing needs, both at home and at the office.
For Intel to break investors' mindset that it is solely a PC-centric company, it needs to emphasize segments of its business that are not just related to the PC. Intel's Data Center group includes its cloud services and data segments, as well as network and storage equipment. I recently sat down with Intel's Mark Miller to discuss the Data Center portion of Intel. "From a pure technical standpoint, Intel is at similar power levels to ARM-based data centers," Miller said in a recent interview. "We're not too concerned from a power stand point."
The knock on Intel is that its -x86 architecture has always been a power hog, and that's why chipsets based off ARM Holding's intellectual property have become dominant in smartphones and tablets. Intel's Atom processor, its low-power chipset, plays a heavy role in its Data Center segment, allowing Intel to demonstrate revenue growth.
Intel needs to focus more on alternative initiatives such as its Data Center group to change investor perception. That's where a new CEO can make headwinds. The company recently announced a major design win for its burgeoning foundry business, winning Altera's business. Intel is hell-bent on upping its foundry business, despite the fact this segment would have lower gross margins than Intel investors are used to seeing. Intel's gross margins have been in the high 50% to low 60% range predominantly. If the foundry business takes off, that could suppress margins, as the business itself is built on volume.
Winning a foundry deal with Apple would go a long way towards changing investor perception about Intel. The company's Intel Media business is a nice segment and could potentially turn into something down the line, but it's not going to move the needle anytime soon for a company with annual revenues over $50 billion. A continued focus on its Data Center and nascent Foundry businesses would.
In the meantime, investors can sit back, and take some comfort in the 4% dividend yield. However, to really change investors' perceptions and reignite growth in shares, a change in strategy and focus would be wise by the new CEO.
Otherwise, "Intel Inside" will go from being a slogan to something investors don't want to see hanging around their portfolios.