Why This Week Is Critical for Intel

Intel reports fourth-quarter and full-year earnings on January 16. Here's what investors should look for in its report.

Jan 15, 2014 at 1:00PM

It's a big week for chipmaker Intel (NASDAQ:INTC), which desperately needs to prove that it can buck the trend of declining personal computer sales. Intel struggled mightily throughout most of 2013 due to the well-publicized decline of the PC. Intel has yet to demonstrate that it can get its chips into smartphones and tablets.

Since Intel's chips are utilized in roughly four out of five PC processors, investors are understandably concerned that the company's chips may be a modern-day buggy whip. With so many dark clouds hanging over its industry, here's what you need to watch for when Intel reports earnings on Thursday after the close. 

Can revenue stay afloat?
A recurring theme throughout technology earnings in 2013 was earnings growth driven primarily by cost cuts and share buybacks. Meanwhile, a few technology giants haven't produced revenue growth. This is troubling, since the overall global economy has steadily recovered since the financial crisis. 

For example, other companies reliant on the PC for profits fell on hard times last year. Hewlett-Packard (NYSE:HPQ) saw its revenue drop 7% in 2013. Not surprisingly, its personal systems segment was a major culprit. Revenue in that division fell 2% in 2013, with consumer segment revenue dropping 10%. This is entirely reflective of the current environment, which is a tough one for the PC.

Clearly, the soaring popularity of tablets, smartphones, and other mobile devices has come at the direct expense of traditional desktops and laptops. There's now credible evidence to back that up. Industry research firm Gartner reported that worldwide PC shipments fell nearly 7% in the fourth quarter. That represented the seventh quarter in a row of declining PC shipments. In all, the global PC market suffered its worst decline ever in 2013.

Why other hardware companies are switching focus
One technology giant that saw the writing on the wall long ago is International Business Machines (NYSE:IBM). IBM was once a major player in personal computer hardware, but those days are long gone. IBM restructured itself to become a software and technology consulting business, and more recently, a major player in cloud-based solutions.

IBM intends to generate half its profits from its software operating division by 2015, and has made measurable progress in this regard. IBM increased its cloud-based revenue by 70% in the third quarter.

Meanwhile, Intel hasn't yet been able to break free from the shackles of the PC. After its third-quarter, Intel pointed out that it has more than 40 products introduced for ultra-mobile devices, networking, storage, and server market segments. However, Intel isn't seeing this show up in its business results to this point.

Revenue and earnings per share were both lower through the first nine months of 2013, as opposed to the same period last year. In addition, it has set fairly tepid expectations for the fourth quarter. Intel expects $13.7 billion in revenue, plus or minus $500 million. If it hits its target, revenue would increase only marginally versus the fourth quarter of 2012.

What to look for when Intel reports
Intel had more than its fair share of struggles last year, and yet, its stock price surged as 2013 drew to a close. Clearly, there's an overarching sense of optimism that Intel's business, and the PC market in general, is near a bottom. Intel will have to prove as much in its fourth-quarter report to keep the momentum going.

Of the major issues critical to the company, you should keep an eye out for measurable progress on the smartphone front. If Intel can manage any sort of mobile market penetration, revenue should head in the right direction and so will the stock. 

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Bob Ciura owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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