Intel (NASDAQ:INTC), a leading integrated-device manufacturer, has upgraded its revenue guidance for the second quarter of 2014. In contrast, research firms like Gartner and IDC are projecting shrinking PC sales going forward. What, exactly, caused Intel's improved revenue guidance, considering the fact that the company generates more than 60% of its revenue from the shrinking PC industry?
Reasons for improved guidance
Several things can explain Intel's improved guidance. For instance, convertibles and laptop replacements are on the rise. At Computex Taiwan, several companies, including Hewlett-Packard, Dell, and ASUS, unveiled convertible PCs. Moreover, Microsoft's (NASDAQ:MSFT) SurfacePro 3 has been increasing in popularity. The common thing among all of these convertibles is that they feature Intel's silicon.
OEMs seem interested in convertibles, indicating healthy future growth prospects for this segment of the industry. IDC tends to agree and projects that shipments of convertibles will rise to 27.4 million in 2018, compared to 9.9 million expected in 2014. Gartner has not yet provided projections, but has stated, "Tablet substitution of notebooks will start to dissipate from this year onward as consumers and businesses align the right device with the right usage pattern." Increasing productivity of convertible devices, thanks to Intel's leading-edge 14-nanometer process technology, combined with the ability of convertibles to be used as stand-alone tablets, is the reason behind the anticipated growth of convertibles.
Additionally, Microsoft recently ended technical support for its Windows XP operating system, forcing enterprises into refresh cycles. Many organizations have realized that tablets and smartphones do not meet all the needs of employees, suggesting that refresh cycles will likely result in increased PC or convertible sales.
The point is that PCs are here to stay. The industry will evolve, surely, as growth is already being witnessed in the convertible segment. As a result, Intel will also evolve. The company's silicon is already in the SurfacePro 3 and many other convertible devices revealed at Computex. All in all, the end of technical support for Windows XP will not result in an erosion of the installed PC base of enterprises, simply because smartphones and tablets are not as productive as PCs.
It's all in the definition
IDC is forecasting a shrinking PC market. Intel, on the other hand, is anticipating strong PC demand. Clearly, there are differing expectations about the future of the PC market. IDC projected that PC shipments will shrink by 4% in 2014 and reach 287.3 million by 2018.
However, IDC discloses that these figures do not factor in the effect of PCs with detachable keyboards. IDC is, effectively, referring to convertibles. Conversely, Intel classifies convertibles in the PC segment, which explains the company's anticipation of strong PC demand in the future.
The bigger picture
The strong demand for convertibles will help Intel sustain its PC revenue going forward. However, convertibles will not boost revenue growth significantly, as convertibles will only comprise around 9% of the total PC market by 2018, according to "The Guardian."
Instead, any growth will merely neutralize the threat of a declining PC market. Intel is now pushing its 14nm process technology, which entails higher performance with lower power requirements, at the expense of increased manufacturing costs. Advanced Micro devices (NASDAQ:AMD), on the other hand, is demonstrating superior designs, as the company's 28nm-based Kaveri chips outperform Intel's 22nm "Core i" and Baytrails, according to in-house benchmark tests.
This puts Intel in a difficult position, as AMD's anticipated next-generation 20nm chips are rumored to be capable of competing with Intel's 14nm products, but at lower costs. AMD is growing into a viable threat to Intel in the PC space.
The PC is not going away -- it is simply evolving. Intel will continue to dominate the PC industry with its leading-edge technology and experience. However, this dominance comes at the expense of the bottom line, as competition is intensifying. Growth of convertibles will merely neutralize the declining conventional PC threat, and the costs are rising.
Sid A. has no position in any stocks mentioned. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, Intel, and Microsoft. 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.