Whether or not Intel Corporation (NASDAQ:INTC) had a good third quarter is mostly a matter of perspective. The 7% gain we’ve seen in INTC stock price says the majority of the crowd saw the glass as half-full rather than half-empty. Even so a handful of observers were more than willing to point out its all-important PC arm was still facing an industry-wide headwind.
Here’s the thing: While the personal computer chip market may remain the company’s biggest business line, that’s changing quickly for a couple of different reasons. For one, Intel drives notably better margins with its data center business. And its data center arm is growing at a faster clip than its PC business is shrinking.
It’s time to rethink what we think Intel is, and how we measure it.
This is Not Your Father’s Intel
They say a picture is worth a thousand words. And, it’s more or less true. In that vein, the graphic below tells a critical tale of how Intel’s revenue mix — and profit mix — is changing. The Client Computing Group is the company’s personal computer hardware division. Its Data Center Group reflects data center and cloud-focused hardware and services. The advent of cloud computing has proven a boon for Intel’s DCG business, as it names deep-pocketed cloud-computing providers like Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT) as customers.
Clearly the PC market remains the primary breadwinner. And with just a quick glance, it looks like that sliver of it business is doing fine. The Client Computing Group’s operating margins even grew last quarter, from 37% a year earlier to 41% this time around.
There’s a key footnote worth bearing in mind from Intel’s third quarter earnings call though. Unit volumes were down 7%, only offset by a 7% increase in average selling prices. It was mostly the “adjacencies” that drove the CCG’s improvements, and not hardware platforms themselves. That’s in contrast with the Data Center Group’s quarter. It saw a 7% year-over-year increase in platform sales, and 4% growth in unit volumes. Operating margins have always been strong here, rolling in at 46% again last quarter.
And, zooming out to an annual chart of the company’s revenue mix (smoothing out any seasonality), the growing importance of data centers and the weakening importance of personal computing to Intel becomes even clearer.
Data center revenue now accounts for 45% of Intel’s business, with the 50% mark in sight.
With this paradigm shift as the backdrop, some things Intel CFO Bob Swan said shortly after the company’s third quarter numbers were posted are now much more prophetic. Among the most notable of those comments, “We’ve dramatically expanded our serve market where we have this collective set of capabilities that we think are well positioned to capitalize on what we believe is increasingly a data-centric world.”
Separately, Swan opined “We’re going to see it continue to become a bigger and bigger portion of our business.”
Furthermore, analysts are starting to see and believe in the reconfiguration as well. Loop Capital Markets analyst Betsy Van Hees explained after the release of the third-quarter numbers, “They are going through a transformation. They’re handling it and realigning the organization in the face of a very challenging environment when their core business is on a secular decline.”
Loop Capital rates INTC stock a “Buy.”
Bottom Line for INTC Stock
It’s important to understand that not all the rhetoric reflects appreciation for Intel’s shift, which can work against INTC shares. Case in point? The headline “Intel’s Lingering Reliance on PCs Keeps Sales Growth Subdued” seemingly seeks to avoid pointing out Intel’s bright spots.
There’s also the not-so-small reality that INTC shares are technically overbought, thanks to the post-earnings surge; some profit-taking is in the cards.
What Intel is becoming, however — and in most regards what it has already become — is something somewhat unfamiliar. But something with tremendous promise. It’s not going to be predominantly a PC company much longer. Sooner, rather than later, the market will stop treating it as such. That’s a good thing.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
