It was just two months ago -- following its announcement of a strong Q4 and fiscal 2014 -- that Intel (INTC +3.56%) stock was trading near $37 a share. And why not? Record quarterly and annual revenues for a longtime industry leader, as Intel reported in mid-January, warranted the Street's good tidings.
All the excitement surrounding its strong financial results led to a 2015 Q1 revenue forecast that would have blown the doors off the year-ago first quarter. Alas, the expected pop from all the small and medium sized businesses refreshing their respective Microsoft (MSFT 0.68%) Windows XP PCs won't come to fruition, among other concerns. So management's earlier exuberance waned, and its stock has taken a beating -- which should be music to the ears of long-term growth and income investors.
What's the big deal?
Most any time a company lowers earnings guidance, as Intel did last week, its stock is going to take a hit. What made Intel's lowered expectations for Q1 worse was the scale of its revision. Instead of the $13.7 billion in revenue Q1 was supposed to generate -- which would have been a nearly $1 billion improvement from 2014's first quarter -- Intel is now forecasting about $12.8 billion, give or take.
In addition to the aforementioned lack of Windows XP refreshes, Intel has been hurt by the strong dollar like many other multinationals. Gross margins should remain about 60%, due to higher sales prices, and spending should also come in around $4.9 billion, in line with what Intel had forecast for the quarter. Despite maintaining solid margins and managing overhead, a $900 million decrease in revenue has been a tough pill for investors to swallow. But there's more to the Intel story than OS upgrades and currency exchange rates.
Down, but not out
When Brian Krzanich was named CEO in May of 2013, he made it clear that Intel was in the midst of drastic changes. Like its longtime partner Microsoft, Krzanich knew that growth from the PC market simply wasn't going to cut it. Just as with Microsoft CEO Satya Nadella's mobile-first, cloud-first mantra, Krzanich's objective is to lead Intel "into the next era."
For Intel, the "next era" includes mobile, cloud-related solutions, and the Internet of Things (IoT). And a look at last quarter in these key areas is where things get interesting for investors in search of value, particularly Intel's stellar data center results, thanks to cloud and IoT.
Sure, the majority of Intel's revenues are still derived from its PC unit, but that is changing with each passing day. Data center sales climbed 25% last quarter compared to 2013's Q4, hitting $4.1 billion, which was an impressive 11% jump sequentially. Just as importantly, data center sales account for a larger piece of Intel's revenue pie. Case in point: in 2013's Q4, data center revenues equaled about 27% of Intel's PC group sales. This past quarter, the figure was 32%.
What's the big deal? In large part because of a shift to cloud technologies and the implementation of IoT, data center growth is set to explode. Global data center traffic is expected to nearly triple over the next three years, and cloud-specific data traffic will jump nearly four times, with much of that growth due to IoT. And Krzanich has Intel ideally positioned to ride the cloud and IoT data center wave.
As for Intel's efforts in mobile, clearly Krzanich and team have a lot of work to do. Easily its worst performing unit last year, mobile is the one area where Intel bears have a legitimate beef. But what's this? Rumors are picking up steam that Intel could find its way into the next iPhone by way of a cellular modem. While not an end-all, cure-all by any means, supplying products for one of the world's most popular devices would certainly give Intel's mobile efforts a shot in the arm.
There are a couple of other considerations for long-term investors, too. In terms of value, Intel is trading at a paltry 12.9 times future earnings, easily making it one of the least "expensive" stocks in its industry. Also, Intel's dividend is at, or near, the top of the heap. Of the big boys, only Microsoft's 3% dividend yield comes close to Intel's 3.1%.
Once investors begin to focus on the "new" Intel -- the chipmaker focused on data centers, cloud, and yes, even mobile, results -- and stop trading its stock solely on short-term changes or the PC market, patient shareholders will reap the rewards.
