Intel’s Q1’17 Earnings Preview: Data Center & IoT To Drive Growth As PC Momentum Is Unlikely To Sustain

Leading PC processor manufacturer, Intel (NYSE:INTC), is set to release its Q1 2017 earnings on April 27th. Despite a continued decline in PC shipments, Intel, which still derives more than 50% of its revenue from the PC market, managed to increase its top line by 7% in fiscal 2016. In addition to a stable PC business (driven by a richer product mix), much of the company’s growth was driven by strong growth in the data center and Internet-of-Things (IoT) business. We believe that the positive momentum from the PC market is unsustainable in the long run and an increasing focus on data center and IoT is what will drive Intel’s growth going forward.

For the full year 2017, the company expects revenue to remain relatively flat and forecasts non-GAAP EPS (diluted) of $2.80, +/- 5%.

See our complete analysis for Intel 

Client Computing Business Remains Under Pressure From PC Market Stagnation

Though Intel saw a demand pick up in PC shipments, driven by strength in gaming and high-end shipments, and higher ASPs for its PC processors in Q4 2016, this growth seems to be unsustainable in the longer run. This is primarily because of a fundamental change in the PC buying behavior. An increased dependency on smartphones has stretched PC life cycles longer, offsetting the slight growth from the PC enthusiast market. PC sales declined by 6.2% in 2016, and Intel anticipates shipments to decline in the mid-single digits this year, as well. While the company has lowered its dependence on PC sales significantly in the last few years, it still generated more than 50% of its revenue from the PC market. Thus, the continued decline in PC shipments will limit growth potential for Intel.

On the positive side, client computing operating income increased significantly in 2016 as a result of a richer product mix and improvements in unit costs of 14-nanometer processors. The above factors could continue to improve Intel’s PC profitability in 2017.

Data Center And IoT To Be Major Growth Drivers For Intel In The Long Run

As mentioned above, Intel has consciously lowered its dependence on PC sales and now derives its revenues from a much more diversified portfolio. Intel claims that going ahead, it expects server revenue growth to offset the decline in PC shipments. The company expects a strong surge in data generated by the smart and connected devices in future. To support this surge, cloud infrastructure has to expand, which, in turn, will drive the growth in Intel’s server processor shipments. Furthermore, the demand for server processors supporting machine learning is also likely to significantly increase going ahead. Given that Intel has a strong product portfolio catering to this market, it is likely to benefit from this growth opportunity. Currently, Intel powers more than 90% of the servers which are deployed to support machine learning.

In March of this year, Intel entered into a definitive agreement to acquire Mobileye, which offers leading computer vision expertise to create automated driving solutions from the cloud through the network to the car, for nearly $15 billion. The acquisition is expected to position Intel as a leading technology provider in the fast-growing market for highly and fully autonomous vehicles. Automotive is one of the fastest and most promising sub-segment of IoT. Intel estimates the vehicle systems, data and services market opportunity to be up to $70 billion by 2030. ^[1]

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1. Intel Acquisition of Mobileye [↩]