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Intel Stumbling Amid PC Declines

|About: Intel Corporation (INTC)

Summary

Semiconductor industry undergoing shift in large part due to mobile devices and tablets.

Commoditized chips are hurting operating income while falling PC shipments hurt outlook.

Skylake release expected to catalyze a wave of new growth for fledging sales.

Diversification into new businesses such as Internet of Things shows great potential.

Semiconductor giant Intel Corp. (NSDQ:INTC) has experienced falling share prices and struggled with declining revenues through 2015 and through much of the past twelve months. However, recent announcements from the company combined with growing sales in the company's data center group should push revenues higher to end the second half of the year, as well as push share prices to 6-month highs. Throughout this downturn, Intel has managed to keep its dividend yield steady, and at very low prices, could be an intriguing proposition for value investors. The question remains, however, as to how long Intel can keep this position in the face of a changing technology sector.

The Fundamental Picture

Intel has made a name for itself as one of the PC market's main distributors of processors and semiconductor technology. The company has been a mainstay in equipping computers with their chips, and has also managed to be on the cutting edge of the semiconductor and processor game. This has led to it relying heavily on this side of their business for their revenue streams. Today, Intel is divided into four major divisions: PC Client Group (PCCG), Data Center Group (DCG), their new Internet of Things (IOT) division, and Software and Services. As of now, the company takes 88% of its revenues from its PCCG and DCG divisions, while IoT creates approximately 4%, while all other divisions are responsible for the remaining contributions.

Until now, this model has worked well for Intel, but recent trends in the PC market have created a problematic situation. Starting in the second half of 2014 and extending well into 2015, PC sales have been in a major slump, owing to rising sales and the increasing capabilities of tablets and smartphones. The second quarter of 2015 saw computer sales drop 11.8% year over year, and PC shipments are expected to drop 4.5% worldwide this year. The problem then becomes that what has worked for Intel until now (and has worked quite well) is slowly becoming an obsolete model. The company's most, recent earnings report showed that while revenues are slightly up from the previous quarter (3%) they are still down 5% from the second quarter of 2014. The 25% decrease in operating income is evidence tantamount to the ongoing shift in the industry.

Recently Intel has attempted to offset this massive disparity by focusing efforts on their IOT division. This, however, is a tricky gamble, and offers no real indication that it can be successful in the short-term. The division has not shown true growth potential, growing sales in the first half of 2015 by only 7%, and letting profits actually slide 11% to $232 million from $261 million previously. Intel's problem in this sector is their focus on hardware, the commodified nature of which has seen chips for IOT devices selling near a $1 price point while the true value lies in data collection and analytics. On a macro level, the Internet of Things still has not been fully exploited, and it has not shown real potential for profits.

The Silver Skylake Lining

It is not all doom and gloom for Intel on the horizon. Recently the company has had some major hits that have slowly restored investor confidence while helping revive share prices that have fallen -20.80% year-to-date. The company's Data Center Group has recorded solid growth in revenues, nearly 10% year over year and are expecting 15% growth in 2015. Intel also recently announced the forthcoming launch of their new processor architecture, Skylake, which is expected to be a major hit with great upgrades in performance and processing power for computers that include this family of chips. Intel has already seen 800 new laptop designs that use the new architecture prepare to come to market in the next year and a half and are looking to their new product line to help stabilize faltering sales. The rapid decline of major competitor AMD, which has been struggling to stay above board for most of 2015, has also helped Intel's Nvidia graphics line and overall CPU sales.

With these tailwinds helping to offset recent headwinds to growth, these latest developments could signal a turning point for Intel shares which have been hard hit over the last year. Share prices are showing increasing signs of stabilizing and with a price-to-earnings multiple of 12.18, Intel is much more fairly valued than many of the unicorns in the technology space. With growth expected to come from new areas including the Internet of Things and the latest processor advancements, it is not unreasonable for Intel to rebound back towards $30 per share before making a run at the May highs of $34.46. Strong earnings and a robust dividend yield of 3.34% make this an attractive entry point for longer-term Intel Corp holders and income investors looking for opportunity amid current market turmoil.

Conclusion

Intel is in the midst of a volatile period. As overall market trends shift away from the company's bread and butter revenue streams, Intel is slowly losing money due to their lack of diversification. New product releases and improvements in existing lines should help the company boost their share prices to around consensus targets in the low to mid $30s, but potential investors should be wary of the company's long-term potential ability to maintain high revenues and continue growing. As of now, the company is a solid bet as a dividend option, as they have been able to maintain a great dividend yield for the past decade and counting. The second half of the year should be telling of future trends, but the end of 2015 could provide a boost in PC sales, as well as the company's attempts to break further into the mobile, ultrabook, and 2-in-1 markets. For now though, investors seeking a value entry price and solid dividend returns would be hard pressed to find better in an industry full of unicorn valuations.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.