Chip giant Intel's (INTC +2.97%) data center group (DCG) business has boomed over the course of 2018. During the first three quarters of the year, this segment turned in more than $16.9 billion in revenue -- up 25.5% year over year -- and saw operating profit expand to $8.4 billion from $5.4 billion a year earlier.
That performance apparently pleasantly surprised even Intel, with CFO and interim CEO Bob Swan saying on the company's Oct. 25 earnings call that the DCG business "is growing at more than twice the rate we expected in January."
Image source: Intel.
Last quarter, the segment turned in sales of $6.14 billion. And looking ahead, Swan told investors to expect DCG revenue to "set another revenue record of approximately $6.3 billion in the fourth quarter."
Although that figure is solid in itself, it would represent year-over-year growth of just 13% -- a far cry from the growth rates that the segment enjoyed in the first three quarters of 2018.
Let's go over why the growth rate of Intel's DCG segment is set to come down in the fourth quarter of 2018.
"A much tougher comp"
Swan said that Intel expects "really solid demand" for its data center products in the fourth quarter. He conceded, though, that "it's on a ... much tougher comp because fourth quarter last year was a great quarter for the DCG business."
Although it may seem hard to imagine a time when demand for data center processors hasn't been booming, given how strongly the business has performed during 2018, last year wasn't that great for the segment. In 2017, Intel's DCG revenue rose less than 11%.
The segment enjoyed 19.6% growth in the fourth quarter of last year; DCG sales growth during the first three quarters of 2017 was just shy of 7.3%.
This means that DCG had much easier baselines to grow from during the first three quarters of 2018 and has -- as Swan observes -- a much tougher baseline to grow off of in the current quarter.
Expect DCG growth to slow in 2019
One of the "headwinds" that Swan highlighted for Intel as a whole on the Oct. 25 call is that "this has been a fantastic year for us and I think for the industry, and that just makes comps a little bit tougher as we go into next year."
That's true for the bulk of Intel's business, and it's especially true for DCG.
Indeed, it's worth pointing out that recent history shows that after DCG has a year of particularly rapid growth, it has been followed by significantly lower growth rates in the following years. For example, in 2010, Intel reported DCG revenue growth of 34.8%. That was followed by 16.5% growth in 2011, 6% growth in 2012, and 6.9% growth in 2013. Intel saw DCG revenue surge 18.3% in 2014, which was followed by a little more than 11% growth in 2015, about 7.9% growth in 2016, and then roughly 11% growth in 2017.
After a huge 2018 for DCG, don't be shocked if that growth rate comes down substantially in 2019.
