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Intel’s Business Transformation: Will Slow 2017 Growth Pay Off?

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Intel’s Business Transformation: Will Slow 2017 Growth Pay Off? PART 1 OF 11

Intel’s Business Transformation Continues in 2017

Intel and its major business transformation

After posting record revenue in fiscal 2016, Intel (INTC) stock rose to a 52-week high of $38.45 on January 27, 2017. Then it took a downward path. Strong earnings couldn’t help it maintain a high stock price since prices largely depend on future growth opportunities rather than past growth.

Intel is going through a major transformation from a chip-centric company to a data-centric company. It’s investing in things that produce data or require data that need to be computed. So 2017 may not be Intel’s year.

Intel’s Business Transformation Continues in 2017

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Intel’s transformation started in 2016 when it underwent organizational restructuring with several changes to top management and 12,000 job cuts. The transformation could go to the next level in 2017 with its 10nm (nanometer) product ramp-up, the launch of Optane products, AI (artificial intelligence) products, premium mobile modems, and IoT (Internet of Things) products.

Intel expanding its addressable market

Intel is expanding its TAM (total addressable market) from $45.0 billion, centered around PCs (personal computers) and server CPUs (central processing units), to $220.0 billion in PCs, data center, NVM (non-volatile memory), mobile, and IoT.

The transition is bringing Intel in direct competition with Nvidia (NVDA), Qualcomm (QCOM), and Broadcom (AVGO) in the data center, mobile, and networking markets, respectively.

What concerns analysts and investors?

The major concern among analysts and investors is that Intel’s growth sectors of IoT, memory, and PSG (Programmable Solutions Group) still account for only 11.6% of its revenue. Even in the data center segment, which accounts for 29.0% of its revenue and 58.0% of its operating income, high-margin enterprise products are declining, and low-margin cloud and networking products are growing rapidly.

These growth segments require huge investments, thus hurting the company’s margins. Over the next three years, Intel expects its gross margin to fall modestly, its revenue to rise in the low single digits, and its EPS (earnings per share) to rise faster than its operating income.

Rivals in a better position than Intel in 2017

Rivals Advanced Micro Devices (AMD) and Nvidia have strong growth opportunities for 2017 as they launch their next-generation products. Nvidia could benefit from the installation of its autonomous drive platform in Tesla (TSLA) cars. AMD could benefit from its Ryzen CPUs that aim to take some market share from Intel in the PC and server markets.

Fiscal 2018 looks comparatively better for Intel as its product transformation starts yielding results. In this series, we’ll look at the short-term and long-term growth opportunities and risks that Intel is facing.

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