Intel has defied its critics and rallied tremendously since the start of the year.
This is despite slowing growth in its core PC group.
Assuming PCs keep stabilizing, an exciting new area known as the Internet of Things is a major growth avenue going forward.
Semiconductor giant Intel (NASDAQ:INTC) has had a great run lately. Shares have soared since the beginning of the year, from $26 per share to its current level of around $35 per share. This represents an amazing 34% return, not including dividends, just in the past eight months.
This rally is even more impressive because Intel's core business, personal computers, isn't growing. The shift from PCs to smartphones and tablets is in full swing, and it seems the best hope for companies reliant on the personal computer is for worldwide shipments to simply stop declining.
In that light, it might be hard to imagine how Intel could grow revenue and profits enough in the future to justify its incredible rally. Here's what Intel needs to do to keep its amazing momentum intact.
Hope for the PC to stabilize
For better or worse, Intel's flagship business is still the personal computer. Intel's PC Client Group operating segment produced just 2% revenue growth over the first half of the year, which is making it difficult for the overall company to grow. That's because the PC Client Group accounts for 62% of Intel's revenue.
Fortunately, there are signs that global PC demand is near its bottom and is indeed stabilizing. A different company that is still reliant on the personal computer, Hewlett Packard (NYSE:HPQ), reported 8% revenue growth in desktops and 17% revenue growth in notebooks last quarter. On the company's ensuing conference call, Chief Executive Officer Meg Whitman stated that HP is increasingly seeing customers upgrade their PCs, and HP is looking forward to continuing the product refresh cycle.
Intel is counting on this as well. On the company's last conference call, CEO Brian Krzanich said that the installed base of PCs at least four years old is now 600 million units. While the consumer segment remains challenging, he pointed to strength at the enterprise level in small and medium-sized businesses.
Separately, other industry data confirms the same thing. Gartner recently published a report saying that worldwide PC shipments were flat in the second quarter of 2014, after eight straight quarters of decline. In addition, another industry watchdog, IDC, stated that global PC shipments fell 1% last quarter, which was far better than the firm's projection for a 7% decline.
Assuming stabilization continues, and if Intel can manage even slight growth in its PC Client Group segment going forward, it should help keep the company afloat and allow its higher-growing segments to carry the weight.
Internet of Things
One of the most exciting businesses to fuel Intel's future is the Internet of Things. This is an area in which nearly all devices are connected. Mobile, home and embedded devices could all be connected to the Internet to integrate computing abilities. This would allow all these connected devices to share data over the cloud.
The Internet of Things is Intel's fastest-growing operating unit by far. Through the first half of the year, this segment grew revenue by 27%, led by the retail and manufacturing sectors. The Internet of Things has now become a $1 billion business by revenue. There's plenty of room for Intel to keep growing in this area, as the Internet of Things represents less than 4% of the company's total revenue.
Bringing intelligence to more and more devices holds huge potential for Intel, and the Internet of Things is a great catalyst for future growth. If so many devices are connected, this could become a multi-billion dollar business for Intel.
The company still derives the vast majority of its revenue from PCs, but that is changing. Intel is making progress in smartphones and tablets, and recently reiterated its forecast to get its chips into 40 million tablet units by the end of this year.
Assuming PC shipment stays firm, or even grows slightly, Intel should have no trouble meeting its forecast for 5% revenue growth in 2014, thanks to strong growth in some exciting new areas.