A weakening global economy and the shift in consumer preference from PCs to tablets have somewhat dampened chip giant Intel's (NASDAQ:INTC) growth outlook for the year. The company which released its second quarter results recently said that its revenue would grow around 3% to 5% in 2012 as opposed to the higher single digit percentage growth it predicted earlier.
Intel saw second quarter revenue increase slightly to $13.5 billion mainly on the back of strong inflows from its data center group which primarily deals with virtualization and server products. Intel also managed to boost gross margins as well. However, net income took a slight haircut from the prior year period at $2.8 billion.
Intel's results seem way better than rival AMD (NYSE:AMD), which saw a slump in second quarter revenue by 10% and an even more catastrophic 40% fall in profits on the back of poor sales performance in China and Europe.
So what exactly is bugging Intel?
Well firstly, the overall demand for personal computers is declining in developed markets like the U.S. on account of explosive popularity of tablets, such as Apple's (NASDAQ:AAPL) iPad. The iPad has not only become a hot favorite among ordinary consumers, but has also become the device of choice in the workplace as well. Though Microsoft's (NASDAQ:MSFT) recently launched Surface could give the iPad some serious competition in the corporate space.
Next on the list is the weakening macroeconomic conditions in developed regions such as the US and Europe, which is further slowing demand for Intel's products. Emerging markets such as India, China and Brazil have been driving PC sales all this time. However, demand in these markets is also beginning to soften due to moderating growth and currency fluctuations. Moreover, the upcoming launch of Microsoft's Windows 8 in October is encouraging consumers to hold back purchases of personal computers, which is again resulting in weaker chip sales for Intel.
But despite these problems, it's not like Intel is sleeping on the job.
According to Intel's CFO, the company is using the weakening demand as an opportunity to wind-down production of its less advanced chips so that it can use some of its manufacturing facilities to ramp up its latest offerings.
Needless to say, Intel already enjoys a clear advantage over its rivals in terms of technology, scale and financial power. In the light of other fabless chip makers such as Qualcomm (NASDAQ:QCOM) and NVIDIA (NASDAQ:NVDA) still struggling to ramp up 28-nanometer based chips, Intel's latest "Ivy Bridge" processor based on the cutting edge 22-nanometer process demonstrates a technological lead. However, with the majority of tablets still running on ARM (NASDAQ:ARMH) based processors, Intel would need to do a lot more to make a dent in ARM's market share.
Intel has promoted the Ultrabook concept with great gusto. There are as much as 140 models based on the "Ivy Bridge" platform on their way, of which 40 would have touch screens and many of them would also be hybrids - a.k.a. notebook cum tablets. But Intel hasn't stopped at that. It does realize that the entry into the smartphone and tablet arena is essential in the long run.
There are 20 Windows 8 tablets set to be released that would use Intel's low cost, low powered "Clover Trail" system-on-chip. Intel is also slowly but surely entering the smartphone space. We saw Lenovo launch the first smartphone with an Intel processor in China. The LAVA XOLO also became the first Intel processor based smartphone to be launched in India as well.
Many of you might say that Intel's mobile chips are still not as efficient as ARM's designs. That might be the case, but I feel this is all just a rehearsal for success. Given the amount of financial resources the company has to fund research and development, it's just a matter of time before Intel starts gaining a clear edge and momentum in the mobile space.
So Intel may be losing steam, but it's just warming up for the big fight in the smartphone and tablet space.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.