Why Intel's Surprise Announcement Means the PC Isn't Dead After All

Don't look now, but rumors of the death of the PC may be greatly exaggerated, thanks to a product refresh cycle at the enterprise level.

Jun 15, 2014 at 10:00AM

Now that we're in the age of smartphones and tablets, you may have heard that the personal computer is dead. After all, industry reports and earnings reports from companies still tethered to the PC foretell the same thing. Supposedly, mobile devices are taking over, and growth in personal computers going forward would be extremely unlikely.

But chip giant Intel Corporation (NASDAQ:INTC) has something to say about that. Intel just raised its current-quarter and full-year outlook, based almost entirely on more robust PC demand than it had previously anticipated.

Not surprisingly, shares of Intel jumped the day after the announcement, since Intel's past forecast called for little to no revenue growth this year. You can bet that this is good news for Hewlett-Packard Company (NYSE:HPQ) as well, shares of which rose strongly the same day.

Despite what you may have heard over the past year, Intel wants you to know that the personal computer is alive and well.

Intel's momentum set to accelerate
Chip stocks like Intel have performed well to start the year, and the company's updated guidance may mean its got further room to run. Intel raised its revenue and margin guidance for both the current quarter and the full year. Intel now expects $13.7 billion in second-quarter revenue, $700 million more than it previously guided.

Plus, Intel expects revenue growth this year as well. And, it also sees gross margin expanding by a full percentage point, to 64%.

Management attributes this unexpected growth to stronger-than-expected demand in business PCs. There were signs that an upcoming product refresh cycle was the impetus for chip stocks such as Intel rising to begin 2014. There's now solid evidence that this is indeed occurring.

Intel's announcement definitely came as a surprise, since most industry research up to this point had almost nothing but bad news about the state of global PCs. For instance, two of the top industry watch dogs, Gartner and IDC, both stated that global PC shipments fell in the first quarter. shipment volumes over the first three months of the year fell 4.4%, according to IDC. Gartner found that shipments dropped 1.7% in first three months of the year. This marked the eighth straight quarterly decline.

In addition, IDC had fairly dour things to say about the future. In its report, it noted:

The transition to more mobile devices and usage modes is unlikely to stop, although the short-term impact on PC shipments may slow as tablet penetration rises. There is potential for PC shipments to stabilize, but not much opportunity for growth.

Clearly, Intel's update flies in the face of industry data. This should be good for a slew of companies heavily involved in personal computers, like Hewlett-Packard. HP is making inroads in non-PC related areas, such as the cloud and big data, but its personal systems group still makes up approximately 30% of its revenue. As such, any uptick in enterprise PC shipments stands to bode very well for HP.

The news couldn't come at a better time for Intel, which has posted two consecutive years of falling revenue. The trend continued in the first quarter of this year, when the company's PC client group revenue fell 1% year over year. This might not seem like much, but the PC segment accounts for roughly 61% of Intel's revenue. Clearly, a rise in PC activity at the enterprise level is great news.

The Foolish takeaway
A common theme that circulated throughout the technology sector over the past few years was that the PC is dead. Industry data and weak earnings from companies still chained to the PC supported the idea that tablets and smartphones are the wave of the future. While it's true that growth going forward will largely be focused in mobile computing, it seems premature to declare that the PC is dead.

Intel expects revenue growth and margin expansion this year, which is a great sign that its turnaround is gaining traction. And, at just 15 times forward earnings, Intel is still modestly priced, meaning its shares may still have room to run.

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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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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