Intel's (NASDAQ:INTC) turnaround is set to continue. The chipmaker released terrific second-quarter results, driven by strong PC sales. Moreover, Intel is of the opinion that the worst is over for the PC industry, and this should continue driving its turnaround going forward. So far this year, Intel shares have gained 30%, and after looking at the company's strategies and the end-market scenario, it can continue getting better in the future. The company also issued a strong outlook for the current quarter, signifying that it is confident of getting better.
Conditions are improving
Intel is counting on the improving economic environment, the PC refresh cycle, form factor innovation, and the end-of-life of Windows XP. Together, these factors have driven better-than-expected demand. In fact, the microprocessor volume in the second quarter reached an all-time high. The company's performance is also driven by the fact that it powers the most powerful supercomputers to the smallest energy-efficient embedded machines. This diversification has the capability of taking Intel higher in the long run.
The installed base of PCs has currently reached approximately 600 million units, and there are clear signs of a refresh in the enterprise in small and medium businesses. Although the consumer segment looks challenging, particularly in the emerging markets, there are signs of renewed consumer interest and activity.
Product development is driving growth
The Bay Trail family of SoCs has enabled Intel to expand into new segments. Its Bay Trail SoC volume in desktops and clam shells has more than doubled over the last quarter, representing over 60% of its Pentium and Celeron mix, and nearly 20% of its notebook mix. The Bay Trail family is helping Intel expand its presence in devices at lower price points, along with new segments like Chrome-based systems, without compromising on the margins. As Intel ramps up volumes in this market, it will see a jump in both revenue and earnings.
On the other hand, the data center business is growing robustly. It delivered solid year-over-year growth of 19% in the previous quarter. In fact, the revenue from cloud, networking, high-performance computing, and enterprise all grew more than 15% during the second quarter. The increasing demand and revenue growth in several segments shows the growing reach of Intel's technology beyond CPUs for PCs and servers.
More importantly, the Internet of Things Group grew 24% year-over-year, raking in $539 million in revenue. Intel is aggressively expanding the Internet of Things division, and this will allow it to profit from a fast-growing market. Earlier this year, the company had released a comprehensive portfolio to address this market. According to Data Center Knowledge:
"At Mobile World Congress this week in Barcelona, Intel expanded its portfolio of computing and communication assets for the smallest of devices to the most complex mobile networks. Intel President Renee James set the mobile vision in motion, detailing how its products are set to compete in today's mobile ecosystem and shape the next era of computing - the Internet of Things (IOT).
Formerly code named Merrifield, Intel introduced the 2.13 GHz Atom processor Z3480 for the Android smartphones and tablets market. Based on a 22 nanometer Silvermont microarchitecture, the 64-bit ready SoC delivers best-in-class compute performance for the mainstream and performance segments, and solidly outperforms the competition in compute-intensive application, web application and light media editing performance. It is the first Intel Atom SoC to feature the new Intel Integrated Sensor Solution, which efficiently manages sensor data to keep applications smart and contextually aware even when the device is in a low-power state. The new processor also features a PowerVR Series 6 Graphics IP core from Imagination Technologies and is designed for simple pairing with the Intel XMM 7160 LTE platform."
Hence, Intel's innovation in the Internet of Things has allowed it to gain solid traction in this market already, and it could get better going forward.
More products ahead
The chip maker is continuing with its product innovation efforts. Recently, it announced a strategic relationship with Rockchip to accelerate and expand its SoC roadmap for the value and entry tablet market segment. In addition, Panasonic has also decided to use Intel's 14-nanometer process technology in its foundry business.
Intel is also getting ready to launch its next generation Haswell-based Xeon E5 platform, codenamed Grantley, later this quarter. The first 14-nanometer Broadwell Core M processor-based systems are also expected to be released during the holiday selling season, with wider OEM availability during the first half of 2015. Also, Intel's integrated baseband and apps processor for smartphones and tablets, SoFIA, is slated to be launched in the fourth quarter.
A smart capital program
The company also announced a $20 billion increase in its buyback authorization, and expects to execute a major repurchase of stock in the second half of the year. This key change to the capital structure of Intel and its allocation strategy is due to the company's ongoing commitment to delivering shareholder value.
The capital allocation philosophy of Intel is to first invest in its business, then generate shareholder return through its dividend, and then to return cash to shareholders through stock repurchases. Intel plans to continue to return cash to its shareholders by adjusting its capital structure to further bring down the net cash balances. This strategy gives Intel enough liquidity for its operations, and induces strategic flexibility to invest in the business, while also returning cash to shareholders.
All in all, Intel is making a number of positive moves. The company's strategy of attacking growth markets such as the Internet of Things, data centers, and mobile will continue to drive its performance in the long run. In addition, Intel is focused on delivering value to shareholders through repurchases and dividends. It has a solid dividend yield of 3% and a reasonable payout ratio of 48%, which means that it can bump up the dividend going forward. As such, Intel looks like a solid pick from several angles, and investors should continue holding it in their portfolios.
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