Please ensure Javascript is enabled for purposes of website accessibility

1 Thing This Intel Corporation Analyst Is Worried About

By Ashraf Eassa - Jul 26, 2017 at 12:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

All eyes are on the growth rate of Intel's data center group.

Analyst Matthew Ramsay (via Barron's) recently offered some thoughts on chipmaker Intel (INTC 0.62%) and, specifically, its data center group (DCG), following a "lunch discussion" with investors:

During the lunch discussion, we posed the question to the room as to "who believed or had strong conviction Intel could reaccelerate DCG growth back into the double-digits following the Purley platform launch?"

Apparently, Ramsay got "zero hands," which he reportedly said served to illustrate the "skeptical sentiment regarding Intel's datacenter growth prospects amidst new competition" from both direct competitors in the server CPU market as well as indirectly from vendors of specialized accelerators that can be much more efficient than traditional CPUs for some tasks. 

Intel's Xeon Scalable processors.

Image source: Intel.

Competitive threats pose risks to Intel's DCG business in two ways. First, to the extent that Intel loses market segment share, it's losing orders and, ultimately, revenue that it would've had in the absence of competitive alternatives. 

Next, even if Intel can continue to win the substantial majority of business in a competitive environment, the company may be forced to reduce its asking prices on processors (as well as related platform components) to achieve those wins. 

The analyst said that though his team was "impressed with many features the Purley server platform and Skylake CPUs introduce," they "tend to agree" that Intel's DCG returning to double-digit revenue growth is a tall order and ultimately expects 7.6% and 8.5% DCG growth in 2017 and 2018, respectively.

The bar is set -- Intel needs to clear it

At Intel's February investor meeting, the company told investors that it expects DCG to see "high single digit" revenue growth in 2017, but that from 2018 through 2021, it expects this business to enjoy a "low double digit [compounded annual growth rate]." 

This long-term forecast suggests that Intel expects to see double-digit DCG growth in 2018 -- and beyond.

Now, to be perfectly blunt, Intel's track record with respect to predicting the growth in DCG has been rather poor. The company's previous long-term revenue growth goal for DCG of 15% compound annual growth turned out to be quite optimistic in the face of reality.

No doubt, the fact that Intel routinely missed that target led it to reduce its long-term forecast to "double-digit" growth. 

At this point, Intel has a credibility problem with respect to its ability to forecast its data center growth rates. 

If Intel can show, beginning in 2018, that it can consistently achieve double-digit revenue growth rates in DCG, even in this fiercer competitive environment, then investors and analysts might be more willing to give Intel the benefit of the doubt and price in low-double-digit revenue growth in DCG

But for now, the skepticism that Ramsay expresses in his note seems completely warranted.

Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Intel Corporation Stock Quote
Intel Corporation
INTC
$35.59 (0.62%) $0.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
390%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.