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How Will Intel’s Shift Drive Future Growth?

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DCG and IoT segments

In the previous part of the series, we saw that Intel’s (INTC) computing segment showed surprising results and its DCG (data center group) reported 8% quarter-over-quarter growth and 10% YoY (year-over-year) growth in fiscal 3Q15. The company is reducing its dependence on PCs (personal computers) and shifting its focus towards the data center and the IoT (Internet of Things) spaces.

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IoT space

As you can see from the above chart, even though Intel is shifting towards IoT, the segment accounts for a small portion of the company’s total revenue. In fiscal 3Q15, IoT accounted for 4% of the total revenue and reported a 10% YoY growth. Even if the company manages to double its IoT revenue, the segment will contribute about 8% to the overall revenue. This has raised the question of whether the shift to IoT will be able to make up for the decline in the PC space.

Even strong growth in the IoT space may not be able to make a remarkable difference in Intel’s future results. So how does Intel plan to cope with the softness in PC demand?

Data center space

Intel has been steadily increasing its data center business with the segment’s share increasing from 21% in 2012 to 26% in 2014 to 28% in fiscal 3Q15. This has been the firm’s most profitable segment, highlighting its dominant position in the PC server space. The firm had more than 99% of the share in the server space in 2Q15, according to IDC. Intel expects to drive growth by expanding in this segment.

However, some companies such as Qualcomm (QCOM) and HP (HPQ) are coming up with ARM chips that are being used by the data centers of companies like PayPal (PYPL).

Altera’s acquisition

Thus, to speed up growth in both of the above segments, Intel acquired Altera in an all-cash deal of $16.7 billion in June 2015. In the fiscal 3Q15 earnings call, Intel CEO Brian Krzanich lowered its fiscal 4Q15 guidance for data center business from 15% YoY growth to low-double-digit growth due to normal business cycles.

If you are bullish about Intel, you can invest in the SPDR Dow Jones Industrial Average ETF (DIA), which has 1.25% exposure in the company’s stock.

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