The recent earnings release slightly drove up Intel's (NASDAQ:INTC) stock. The increase goes a long way towards pushing the company towards a high it has not seen since the middle of 2012. Despite a 22% increase in the stock price over the last twelve months Intel's stock is still below its high in the middle of 2012. A faster than expected decline in PC demand and stiff competition in the mobile chip market has continued to pose a challenge for the company. There appears to be some chance for recovery as the company posted some mixed results for the first quarter.
PC Problem Caused a Revenue Slip
Intel's first quarter results beat analysts' earnings estimates by $0.01 per share and this is a positive sign for the company when its PC client group sales are declining. The PC problem has continued for the eighth straight quarter as Intel's shipment declined. Some analysts believe the industry's decline is close to hitting bottom, potentially giving Intel breathing room as it struggles to develop better processors for mobile and wearable devices. For the first quarter, Intel generated $12.76 billion in revenue compared to $12.58 billion in the first quarter of the previous year. Despite the improved quarterly revenues, Intel missed analysts' estimate of $12.814 billion in revenues.
The PC client group, which is Intel's core revenue generating business with a 63% stake in total revenue in 2013, experienced a 1% year over year decline and ended the quarter with $7.9 billion in revenues. Apart from the revenue decline, the sales volume improved 1% for the second consecutive quarter in the PC client business. The volume improvement was offset by the 3% decline in average selling price. Worldwide PC shipment is expected to decline to 276.7 million units or 6.6% compared to the total number of shipments in 2013. Intel will continue to face problems in its PC client group during fiscal year 2014 and this may go on until the PC market bottoms out.
The Struggle Continues
So far, Intel's push into the mobile chip market has not been quite successful. This is justified as Intel faces strong competition from chipmaker giant Qualcomm (NASDAQ:QCOM). The mobile and communication group generated $156 million in revenue reflecting a 61% decline from the same quarter of the previous year. Intel shipped 5 million tablet chips for the quarter and said that Intel is on the way to shipping 40 million tablet chips in 2014. Last year, Intel shipped 10 million tablet chips and reached its target for 2014. The company is offering to heavily subsidize manufacturers' costs to include its components in their future tablets.
Intel's 2014 target seems to be achievable as the tablets industry is growing at a fast pace. According to IDC, in 2014 the worldwide tablet market is expected to grow 38.6% as overall adaptation continues to grow faster in markets outside of North America. The total number of tablet shipments is expected to reach 270.7 million units in 2014.
Internet of things, Intel's next long-term target market, showed some good results for the quarter and revenues of $484 million surged 32% year over year. Intel is keen to make sure it is part of the emerging trend of wearable computing devices such as smart watches. In March, Intel bought Basis Science, the maker of a wearable health tracker. This acquisition might help Intel to remain competitive and retain future earnings growth.
The gross margins took a hit and declined two points from the previous quarter, but increased by one point year over year, driven by lower factory startup on 14nm and other non-production cost of sales. Due to the decline in margins the net income of $1.9 billion declined by 5%; however, the earnings per share of $0.38 beat analysts' estimates of $0.37 per share for the quarter.
The Data Center Group and Investment in Cloudera
In the first quarter of 2014, double-digit growth came from the data center group. The data center group is another one of Intel's major businesses, which generated 21% of total revenue. In the first quarter, this segment generated $3.1 billion in revenues or 11% year over year growth.
As the amount of information that enterprises need to handle continues increasing demand for big data solutions is set to rise. The big data market is very lucrative and has grown rapidly in the past few years. According to IDC, the big data technology and services market will grow at a CAGR of 27% to $32.4 billion by the end of 2017. The sluggish PC market and struggle in the mobile chips market has urged the need to diversify into growing technology segments like big data chips and internet of things chips. Aware of the growth potential and much needed expansion Intel recently purchased an 18% stake in Cloudera for $740 million. This is the single largest investment by Intel's data center group and this investment in Cloudera is said to be big enough to make the chipmaker the company's single largest strategic shareholder. As Cloudera is likely to go public this year, Intel could sell its high-end Xeon server processors together with Cloudera's big-data solutions in order to improve its sales performance. The company's focus on server solutions, both at the software and hardware level, is a way to cope with poor sales related to chips for personal computers.
Like its first quarter results, Intel's outlook for the second and full year 2014 is also not quite impressive. In the second quarter, Intel expects $13 billion in revenue reflecting an increase of 2% from the first quarter and for the full year, the revenues will remain flat. Over the next five years, Intel's earnings will grow by an estimated 7% and this is justified because of Intel's struggle in the mobile market and sluggish demand in the PC market. However, growth in the data center group and recent investment in Cloudera are signs that the company will add some consistent growth in next few years before any big progress.
Intel is trading at a trailing twelve months P/E ratio of 14.32X and at further discount when taking into account the forward P/E ratio of 13.56X. In comparison, the industry average P/E ratio is 23.4X and the S&P 500's P/E ratio is 18X. If Intel achieves its 2014 mobile chips shipment target and Cloudera successfully goes public then this stock may bring some reasonable return to investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.