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.
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.