Semiconductor giant Intel (NASDAQ:INTC) is set to report earnings after the bell on Tuesday, July 14. The company, which is still heavily reliant on personal computers, has something to prove this time around. That's because it told investors that business momentum is accelerating.
As a result, its stock price has rallied considerably over the past several months. In fact, shares of Intel are up about 22% just since the beginning of the year. Much of the rally is due to the prospect that Intel is finally gaining momentum.
After several quarters in which revenue stagnated, due to constant pressures on personal computers from increased prominence of smartphones and tablets, Intel finally sees a turnaround ahead. It demonstrated as much when it recently upped its current-quarter and full-year guidance for both revenue and gross margin.
This is setting the stage for a solid second-quarter report. But with all the heightened optimism also comes heightened expectations. Intel needs to make sure it didn't over-promise and under-deliver this quarter, if it wants to keep its rally going.
The stakes are high
Intel has a lot riding on this quarter's earnings report. Aside from increasing its current-quarter and near-term outlook, which has set the stage for a solid report, there is industry data backing up the notion that the personal computer may not be dead after all.
For instance, technology industry research firm Gartner recently reported that worldwide sales of personal computers actually increased last quarter. This would be huge for the industry, as sales of personal computers had previously fallen for several quarters in a row. PC sales declined for two years running, but Gartner estimates sales inched up 0.1% last quarter.
This is a great sign for all companies still tied to the PC, including Intel but also Hewlett-Packard Company (NYSE:HPQ). According to Gartner, HP retained the second spot in the PC market, holding on to nearly 18% of market share.
Rising worldwide shipments are yet another sign that Intel's business is accelerating. Separately, Intel earlier raised its revenue guidance this quarter by $700 million, to $13.7 billion. It also expects a 64% gross margin, one full percentage-point better than it previously forecast. Both of these should combine to boost Intel's profits.
Analyst expectations are also going up. Analysts surveyed by FactSet are expecting $0.52 per share in profits. That would represent strong 33% growth versus the same period one year ago. In the second quarter of 2013, Intel earned $0.39 per share.
Recovery in global PC shipments would go a long way toward cementing the turnarounds for both Intel and HP. Hewlett-Packard has struggled with stagnating revenue just like Intel has. HP's second-quarter revenue clocked in at $27.3 billion, down 1% versus the second quarter last year. That's obviously not an impressive performance, but it could inspire confidence if it indeed represents a floor, which could be possible given the surprisingly good news in the PC market.
Intel's other businesses need to step up
Aside from personal computers, Intel has other businesses segments that are doing relatively well, which will need to keep going in order for its momentum to continue. One particularly exciting arena is the Internet of Things, or IoT. This describes a technological advancement in which nearly all devices are connected. Mobile, home, and embedded devices could all be connected to the Internet to integrate computing abilities. This would allow all these connected devices to share data over the cloud.
The IoT was Intel's fastest-growing business last year, and there's still a great deal of potential there since it represents just 3% of its revenue.
In addition, Intel continuing to progress in getting its chips into tablets would be a great sign. Intel Chief Executive Officer Brian Krzanich has vowed to get his company's chips into 40 million tablet processors by the end of 2014. Intel managed to ship 5 million tablet processors in the first quarter, and management is confident it will reach its goal.
The bottom line is that Intel's turnaround is gaining traction, but is not yet complete. Shares of the chip giant are up nicely to start the year, implying a strong sense of optimism that several of its strategies are working. But Intel's rally could also set the stage for disappointment if it can't live up to its promises.