Semiconductor giant Intel (NASDAQ:INTC) is at a crucial crossroads. It has an entrenched footprint in personal computers, which is proving problematic in an increasingly mobile world. On the other hand, Intel is investing aggressively in getting its chips in a broad array of different products, including tablets. In addition, Intel is on the precipice of some exciting technologies that promise to propel the company into the future, in such areas as data centers and the Internet of Things, or IoT.
Intel's future success depends on these technologies. Evidence is mounting that the personal computer is in a structural decline. In response, Intel's core priorities going forward should not be to try to rescue its sinking PC business. Instead, the company should seek to simply try to stem the decline in its PC operations to the best of its ability. It's crucial for Intel to devote the majority of its research and development expenses to new products and services.
Intel management is already in the process of doing this, and continued progress will be what propels Intel into the next technological age.
Move away from PCs
Intel's first priority is to diversify its product offerings. For better or worse, Intel is still tethered to PCs, which obviously presents a danger since global shipments of PCs are dropping.
In the first quarter of this year, technology research firms IDC and Gartner both found that PC shipments fell. In all, shipment volumes over the first three months of the year fell 4.4%, according to IDC. Gartner found that shipments dropped 1.7% in the same period.
Importantly, however, Intel sees some stabilization occurring in the PC market. Its PC group posted a 5% revenue decline last year, but the company believes the global PC industry is near its floor. After seeing industry shipments fall steeply over the past three years, Intel believes PC unit sales will dip only slightly this year, with a possibility for growth due to a product refresh cycle.
This has caused all sorts of players in the industry a great deal of trouble. Consider Hewlett-Packard (NYSE:HP), which reported a 16% drop in cash flow in the last quarter. In response to stagnating PC sales worldwide, HP is turning to severe cost cuts to keep profits afloat. This includes a recent announcement that the company would cut up to 16,000 jobs as part of its cost controls.
In addition to just cutting jobs, HP is investing aggressively in newer technologies that will propel the company forward. Such areas include big data, servers, and the cloud. For example, HP recently announced a joint venture with Foxconn to develop cloud-enabled servers. And, in big data, HP's newly unveiled Shark system will allow for higher computing performance at up to twice the speed of its competitors.
Intel will similarly step up investment in new technologies, which is the right thing to do in the increasingly post-PC world.
Next, invest in tablets, data centers, and the IoT
Collectively, these three markets represent Intel's future. These are high-growth areas of technology, and Intel is smartly gearing investing toward those businesses going forward. For example, Intel plans to cut investment in PCs by more than 5% this year, as compared to 2012 levels of research and development costs. This is the right thing to do, since shifting investment to new areas will help drive future growth. .
At the same time, Intel is significantly increasing its spending on tablets, data centers, and the IoT. Intel will boost tablet spending by more than 75% this year versus spending two years ago. This is part of management's strategy to get Intel's chips in as many as 40 million tablets by the end of this year.
In data centers, Intel will increase its 2014 investment by more than 10% to expand its footprint in networking, storage, the cloud, and big data. Intel is already reaping rewards from this, as its data-centers group outperformed in the first quarter by posting 11% revenue growth.
Lastly, Intel needs to keep enhancing its presence in the Internet of Things, in which virtually all devices could be connected to each other via the Internet. The Internet of Things, or IoT, describes a technological advancement in which nearly all devices are connected. Mobile, home, and embedded devices could all be connected to the Internet to integrate computing abilities.
This would allow all these connected devices to share data over the cloud. Not surprisingly, Intel is boosting spending in this area by more than 20% on products such as Quark, which the company is hoping will give it a leadership position. Intel's processors will help businesses reduce costs and unlock valuable data from systems that weren't previously connected via the cloud.
Intel's future is very promising
There's no sugar-coating the fact that Intel is still far too dependent on the personal computer, which should concern investors. However, Intel is trying to make up for that by cutting R&D investment in PCs and shifting that spending toward higher-growth products and services. Going forward, Intel is gearing up its investments in tablets, data centers, and the Internet of Things, and for good reason.
Those three areas hold great potential, which is why you should be excited about what the future holds for Intel.
Bob Ciura owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. 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.