Time For An Intel Turnaround?

| About: Intel Corporation (INTC)


Intel’s PC business started turning around in the last quarter of 2013.

The rapid growth in data center construction and the Internet of Things should give Intel good opportunities to grow the business.

Intel’s SoFIA should help the chip giant tap the high-volume budget smartphone market at a lower cost once the 14-nm process is operational.

The secular decline of personal computers has come as a big blow for Intel (NASDAQ:INTC), and there is no respite in sight as IDC forecasts deeper declines in PC shipments for 2014. According to IDC, PC shipments will drop by 6% from the year before to approximately 296 million. However, this is better than the 10% decline that was seen in 2013. Hence, Intel's performance this year should be slightly better than the last one, but that hasn't showed up in the share price so far.

Intel stock is up just 2.5% this year after a solid performance in 2013. The company is planning to cut more than 5,000 jobs this year to boost earnings amid declining demand for personal computer chips. Intel's earnings have dropped from $12.9 billion in 2011 to $9.6 billion in 2013, and the forecast for this year is also not quite positive.

Turnaround moves

However, Intel is trying its best to execute a turnaround. Intel spent 2013 building a foundation in some important growth segments of computing and claimed that it is better positioned this year. More importantly, even though Intel's revenue was down 1% last year due to declining PC sales, the business stabilized and grew slightly in the fourth quarter on the back of record i5 and i7 unit shipments.

Going forward, Intel is focused on capturing the PC market by powering each and every electronic computing device with its processors. It sees opportunity in everything from the Internet of Things to the data center. This would require a change in certain areas like a more focused view of the industry and an effort toward bringing innovations to the market quickly.

Intel has made some progress in this regard as evidenced by certain technologies that were on its roadmap just six months ago and are expected to be delivered this year. Some of these are Edison, an Intel-based platform for the Internet of Things in the form of an SD card, innovative wearable solutions, and an Intel device for the Android platform. Intel has already extended its leadership in the data center with the launch of the Ivy Bridge-based Xeon product line. In addition, with the launch of Avoton, which targets the micro-server markets toward the low end of the data center, Intel has successfully broadened its portfolio.

The data center market is growing at a rapid pace. According to analysts, the global data center construction market is expected to grow at a CAGR of 21.99% over the period 2013-2018. Hence, Intel is making the right move by addressing each and every spectrum of this growth market.

Targeting volumes in smartphones

Last November, Intel also unveiled a new smartphone and tablet roadmap that included SoFIA, Intel's first solid-state drive with integrated comps. SoFIA seems to have a pretty strong opportunity ahead as Seeking Alpha author Ashraf Eassa had pointed out. According to Eassa:

"I'll be honest - SoFIA doesn't look like it'll be anything special. Sure, it'll do well against the quad Cortex A53s and the dual core Kraits that it will be fighting in the low end of the market when it finally shows up in devices, but it won't be particularly well differentiated. Further, given that Intel will be building these at an external foundry, it's not clear if Intel will have much (if any) of a cost structure edge (in fact it will probably not have the volumes that Qualcomm (NASDAQ:QCOM) and MediaTek have, which means that its cost structure could be worse).

So, these parts will essentially be proof that Intel can do an integrated part and it'll probably find homes in a number of handsets and low end tablets (the latter especially thanks to all of the sockets Intel is buying this year with Bay Trail). However, the real fun will happen when this part is moved to the 14 nanometer process. At that point, I expect a move to the "Airmont" CPU cores (14nm shrink of Silvermont), a fairly beefy GPU, and a solid connectivity/cellular solution - all at an excellent cost structure."

Eassa's thesis finds credence with the fact that Intel exited 2013 with an exceptional improvement in its 14 nm process technology and a significant improvement in yields, according to management.

Big opportunities

Intel is making a lot of changes to improve its competitive position in 2014. It is well on its way to reinvent the personal computer with all-in-ones, 2-in-1s, convertibles, and detachables. It will start production of wafers on Broadwell, a 14-nm product. In the tablet market, Intel has launched the Bay Trail SoC and is expanding its footprint. And in the Internet of Things, Intel is bringing new architectures to build on its current position. With the expansion of the infrastructure that supports connected devices in the Internet of Things, Intel is uniquely positioned to benefit from a big market that's expected to be worth $19 trillion.

Also, Intel's data center business continues to see robust growth as a result of the build out of the cloud and the proliferation of devices that compute and connect to the internet. Intel is planning to build on its success in this department with the launch of Haswell-based Xeon family in 2014. The deployment of high performance and low power consuming transistors should give Intel a cost advantage over time and help it outperform.


Intel is finding earnings growth hard to come by, so it is focusing on a wide variety of opportunities to get back on the growth track. While Intel's moves won't reap results in the short run, I believe that given the moves that the chip giant is making, it could be a good buy for patient investors.

Intel's juicy dividend yield of 3.40%, an earnings multiple of 14 that's half of the industry average, and expected earnings growth CAGR of 5% for the next five years look good enough for patient investors. And given the opportunity in various markets such as budget smartphones, the Internet of Things, data centers, and new computing applications, Intel could execute a turnaround in the long run.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.