Back at Intel's (NASDAQ:INTC) 2013 investor meeting, CFO Stacy Smith pointed out -- and I'm paraphrasing -- that a reasonable way to figure out what a company is "serious" about is to look at how the company is spending its research and development dollars. On Intel's most recent earnings call, Smith pointed out the areas where the company plans to invest further during 2015, which tells investors what Intel prioritizes.
Datacenter and process technology
When an analyst pointed out that Intel's research and development spending looked as though it would outpace revenue growth in 2015 and asked why this would be the case, Smith offered the following answer:
There is I would say two things to point to. So first of all, we are making increases in R&D investment in areas where Brian and I have looked and believe we are going to get a significant payoff on those investments. So specifically Data Center Group, the Internet of Things Group and a bit more toward process technology and we are offsetting some of that with decreases in investment in other areas that you see in MCG segment being top of that list and some efficiencies across our Product Engineering Group.
In other words, Intel is actually investing more in its data center group on top of the sizable investment that it has already made in that segment. Given the very high operating margins in this segment (50.6% in 2014), and given that the company needs to defend itself against the litany of powerful entrants gunning for this market, I would say that this is a prudent move.
Intel also has routinely cited manufacturing technology as essentially the key enabler of its product leadership. Intel already invests very heavily in manufacturing process technology, but it is clear that the two big players in the chip manufacturing space -- Taiwan Semiconductor (NYSE:TSM) and Samsung (NASDAQOTH:SSNLF) -- are also upping their investments. I'd say that this is well worth it.
Internet of things group gets a boost, while mobile R&D comes down
Intel is apparently also investing in its Internet of Things group. This is a business that grew 19% in 2014 and one that Intel expects to grow even faster in 2015. Given the high growth, and the relatively attractive operating margin (approximately 28.8%), it only makes sense to increase investments there.
On the flip side, Intel is -- as it signaled at its investor meeting back in Nov. 2014 -- reducing its investments in the mobile group. While Intel has signaled that it still plans to compete in tablets and mid-range to high-end smartphones, it plans to scale back its work in low-end phones.
Intel has signaled that it will still develop key IP for this market, but also that it plans to rely more on third parties like Spreadtrum and Rockchip to spin derivative chips and distribute them. The company's mobile investment is still clearly very large (which suggests that it's quite important to Intel), but it's not as large as it was previously given the new, more focused, strategy.
Ashraf Eassa owns shares of Intel. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple and Intel. 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.
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