Intel - Targeting Top-Line Growth

Jul. 3.14 | About: Intel Corporation (INTC)

Summary

Gartner projects that most of the alignment of devices with usage patterns have been achieved and the trend of switching will begin to dispel.

The company has already entered a multi-phase agreement with Xi3 Corporation to develop, manufacture, and sell next-generation Micro-Mini PCs.

The company projects that a massive number of 40 million tablets with an Intel chip fixed inside of them will be shipped this year.

Intel Corp.'s (NASDAQ:INTC) share price has been rising since the start of this year and has shown a growth of 8.3%; however, the top- and bottom-line growth of the company has remained sluggish for the past few years. The major reason for the plummeting revenues was the company's over reliance on PC sales, a segment that contributes more than 60% to the top line of the company.

Traditional PCs Market

As mentioned above, the traditional PC market is the major revenue driver of the company. However, the market has remained under stress for some time because people are rapidly shifting to smart devices. This led to a general belief that tablets and other smart devices would soon replace the PCs which is quite a leap in my opinion. It is true that PC sales have declined in the consumer market but sales are moving towards stability on the enterprise level. Gartner projects that most of the alignment of devices with usage patterns have been achieved and the trend of switching from traditional PCs to smart devices will begin to dispel from this year onwards. Where PC shipments are expected to decline by approximately 6.6% this year the deceleration of shipment volumes is expected to slow down to about 5% in 2015. There are a number of businesses that require desktop computers and/or laptops and the demand for those devices is still present.

Where is the Growth Coming From?

Anticipated stabilization in PC shipment volumes in the upcoming future is a relief for Intel but that alone does not justify the success of the company. Growth has to come in from somewhere, and the traditional PC market is not that source. While it is true that PC sales are strengthening that trend is not expected to continue in the long term as people and businesses are merely replacing their older equipment with new machines. Therefore for the longer term, the company will have to develop the roots of its other businesses. For that reason, Intel is extensively spending on R&D operations and is possibly looking for acquisitions and/or partnerships. The company has already entered into a multi-phase agreement with Xi3 Corporation to develop, manufacture, and sell next-generation Micro-Mini PCs including Intel's successful Intel NUC (Next Unit of Computing) computers. Micro-Mini PCs are a rare niche in the PC market that are still indicating growth and are in high demand by enterprises in an effort to improve upon performance and efficiency in their businesses.

In addition to that, Intel has decided to endure the cost of paying tablet makers to install the company's chips in their devices in order to induce the initial demand. The company is well aware that it is late in entering the tablet market which is dominated by Qualcomm (NASDAQ:QCOM) chips and buying its way in the market is a bold step. The company projects that 40 million tablets will be shipped with an Intel chip fixed inside them this year putting the company on a 400% growth path. In my opinion, this growth projection is too optimistic considering the fact that Intel's share of the tablet market is negligible; also IDC anticipates that the growth in the tablet market will slow down a great deal from 52% last year to 12% this year. Considering the fact that the tablet market has not yet stagnated, Intel's sales will begin to follow a positive trend in the near future and will improve the company's competitive position. Furthermore, the company recently partnered with Fuzhou Rockchip Electronics Co Ltd to be able to produce low-cost chips and effectively combat competitors in the tablet market. This will also have a positive impact on the overall margins of the company. The actual performance of the company in the tablet market remains to be seen but I do expect the company's margins to grow.

Concluding Remarks

The company's PC sales are expected to increase over the next couple of years; however, once individuals and enterprises upgrade their systems, sales are expected to fall back to where they are today. The company is aggressively looking for ways to up its revenue base but the results of the partnership with Xi3 Corporation has yet to show results. The company's move to penetrate the tablet market might show some positive results but the company must be aware of their rivals' reaction to its bold step.

The share price may remain under stress because of the uncertainties associated with the company's recent moves but shareholders can still expect returns. Intel has more than $10 billion in free cash flows. The company's CFO position increased 10% over the recently ended quarter. The company's dividend yield stands at 3.01% in an industry where 1.13% is the norm. Moreover, the company repurchased shares worth $545 million over the quarter. Such activity to distribute profits among the shareholders is expected to continue in the foreseeable future as well.

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