Intel Corporation (NASDAQ:INTC) recently slashed its first-quarter revenue outlook by nearly $1 billion, sparking a 4% selloff in Intel stock.
INTC pinned the huge cut to a poor transition rate by business customers from the ubiquitous and highly popular Windows XP operating system, almost a year after Microsoft Corporation (NASDAQ:MSFT) ended support for the OS.
However, Microsoft is due to release the highly anticipated Windows 10 later this year. So the question for Intel stock holders becomes: Will the new OS encourage users to finally ditch older OSes and help PC chip manufacturers such as INTC land more business?
Windows 10 Rumored to be a Great OS
Despite its floundering efforts to gain a stronger foothold into the mobile market, INTC still is recognized as a powerhouse in PC chips. The company sold PC chips worth $34.7 billion during fiscal 2014, or about 62% of its overall revenue. Mobile revenue still is more of a byword for the company, accounting for less than 1% of revenue.
Thus, slower PC upgrades can really hurt INTC. Intel’s PC client group revenue grew just 4% year-on-year, significantly slower than the 6% overall growth for the company. INTC lowered its first quarter revenue guidance from an earlier range of $13.2 billion-$14.2 billion to a lower range of $12.5 billion-$13.1 billion.
A huge percentage of Windows licenses are sold with new PCs. Otherwise, PC companies have to wait for companies to upgrade — and they typically don’t unless they have a compelling reason.
Windows XP remains the second-most popular Windows OS after Windows 7, with a market share of 19.15% vs. 14% combined market share for Windows 8 and Windows 8.1 — the latest Windows OSes in the market today. One of the biggest reasons why recalcitrant users have stuck with Windows XP was the poor reception of Windows 8 with its Metro UI and touch-based implementation.
Windows XP has served both business and personal users exceptionally well for years, and Windows 8 just wasn’t good enough to prod them to move up the ladder.
The good news? The buzz is that Windows 10 is going to be one of the best Windows operating systems in a long time. Microsoft, Intel and other PC companies had better hope so — because they need something to spark OS upgrades.
Free OS
The software giant has gone out of its way to help users transition to the new OS as painlessly as possible.
For one, Microsoft will give away Windows 10 to Windows 7 and Windows 8.1 users, which is unprecedented. Last year Microsoft scraped the $25-$90 license fee for Windows OSes for small devices including Windows Phone, Windows RT and Windows 8.
Microsoft wants to get many users as possible to switch to the new OS so that it can get a good chance to up-sell its other services such as Office 365 and its subscription cloud services.
Windows 7 is by far the most popular desktop OS in the market today — about 56% of all the world’s PCs are powered by the venerable OS. But Microsoft says Windows 10 will be capable of running on pretty much the same hardware as Windows 7, which will provide little incentive for users to purchase new PCs when upgrading.
That’s why INTC is banking more on Windows XP users upgrading to Windows 10 to drive new PC sales.
So, how many PCs is that? Let’s do a little back-of-the-napkin math.
There are about 2 billion PCs in the world today. Windows XP has 19.15% desktop OS market share, which translates to roughly 383 million PCs running on the OS. About 25% of these, or about 96 million PCs, are used for business applications. Business users are the ones most likely to buy new hardware as they upgrade to a new OS.
Assuming half of Windows XP business users upgrade to Windows 10, this could mean 48 million new PCs sold — about 16% of the total number of PCs sold in 2014.
Mind you this assumes that no personal users will buy new hardware when upgrading, which does not appear likely.
Bottom Line
There still is a huge number of Windows XP users out there. If the rumors about Windows 10 turn out to be correct, then INTC will have a very good chance to sell significantly more PC chips as users upgrade to the new OS.
If nothing else, that should boost Intel stock for at least a few quarters.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
