Some good things are happening at two of the core revenue-generating divisions of chip manufacturer Intel (NASDAQ:INTC). While the company boosted its revenue guidance for the current quarter, buoyed by enhanced sales of business PCs, Intel also developed a customizable technology that could significantly brighten the prospects of its highly profitable server chip division.
The recent developments amount to welcome news for a company that has witnessed a steady slowdown in growth in the face of a shift toward smartphones and tablets. That's one area where Intel has failed to secure its market presence until now, leading to persistent doubts about the long-term sustainability of these events.
The return of good old computing
Intel's stock price rose by more than 5% after the company raised its revenue projections for the ongoing quarter by around $700 million. While this was prompted by a welcome increase in demand for PCs that cater to business, the scenario was not totally unexpected.
Companies like Intel are likely to enjoy the extended benefits of Microsoft's decision to end support for the Windows XP operating system in April this year, given the sheer number of computers that still run the 12-year old OS and need to be upgraded as a result.
Here's the catch: Until now, this trend has largely been limited to business in developed markets such as the US. The retail segment, on the other hand, continues to see a steady decline in demand for PCs that have been sidelined in favor of more handy devices such as tablets. And with research firm IDC continuing to predict a 6% fall in PC unit shipments for the current year, this may be nothing more than a temporary shot in the arm for Intel.
The competition is never far behind, as industry rival Advanced Micro Devices (NASDAQ:AMD) unveils a technology that is set to improve the energy efficiency of its products by as much as 25 times by the year 2020. That's something that again highlights Intel's continuous need to innovate and stay ahead in the race.
And a bright future for server chips
Apart from PC chips, Intel's highly profitable server chip division, which recorded a 11% year-over-year increase in revenue during the recent first quarter, also seems to be giving reason to feel good at the moment. Apart from introducing a newer and more efficient version of its popular Xeon series of processors, Intel recently adopted a new technology that enables it to produce customizable variants of its server chips for large companies like Facebook and eBay that specifically require such products.
While this is definitely a good move, given the competition that the company is facing in the form of low-power chips designed using technology from ARM Holdings, the entire server industry continues to feel threatened by long-term concerns about cloud computing. At the same time, while server chips yield higher profit margins than those made for PCs, they are certainly no match for the latter category in terms of volume sales.
The shocking facts about mobile chips
None of the above feel-good factors are enough to erase the memory of the stunning $929 million operating loss incurred by Intel's mobile and communications segment during its recent first quarter. That has proved to be the single biggest setback for Intel's plans to catch up with Qualcomm (NASDAQ:QCOM), the established market leader in the smartphone processor category.
Qualcomm has its own share of problems. The company has watched its profit growth shrink as a result of slowing high-end smartphone sales in the developed markets and is now increasingly focusing on emerging markets like China in a bid to cater to the mid- and low-range smartphone category.
But even here, Qualcomm has to fight it out with local chipmakers such as MediaTek that have gained considerable market share by selling products at rock-bottom prices. However, Qualcomm's long-term prospects remain bright, given its expertise in manufacturing chips that offer integrated 4G LTE connectivity. Unfortunately, that's also an area where Intel remains generations behind the former company.
Foolish final thoughts
The sudden uptick in PC demand is unlikely to sustain Intel's profitability in the long term. On the other hand, the improving prospects of its server chip division appear to be more grounded in reality, and the unit is likely to provide support while the company realigns its long-term growth strategies.
For now, Intel's biggest need of the hour continues to be the search for a secure, alternate source of revenue that would help it to rediscover growth and instill long-term confidence in its investors. Until then, all that one can do is to keep a watch on this company from the sidelines.
Subhadeep Ghose has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Qualcomm. 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.