The problems facing Intel (NASDAQ:INTC) -- and the primary reason its share price is down a whopping 18% year-to-date as of this writing -- are well documented.
As the undisputed king of chips powering the endlessly declining PC market, Intel's fortunes continue to follow that of the desktop computer. Even before Gartner released its rather depressing second quarter PC shipment estimates, most Intel analysts were already predicting a miss when it announces Q2 earnings on July 15.
An earnings miss this quarter would certainly be a tough pill to swallow given Intel's already low guidance. Intel execs are expecting about $13.2 billion in sales this quarter, which is down from $13.8 billion in Q2 last year.
But miss or not, long-term investors would be wise not to put too much emphasis on the revenue of Intel's largest division, its Client Computing Group, even though most industry pundits likely will.
Why? Because this isn't your father's Intel any longer. The future of Intel rests on its Internet of Things (IoT) and cloud computing sales, along with a piece of the mobile pie, and those are the areas investors should concentrate on over the long haul.
First, the bad news
This year's second quarter PC sales declined 9.5% due to a strong dollar negatively impacting foreign sales, a tough comparison thanks to longtime partner Microsoft ending support for its Windows XP OS in Q2 2014, and the pending Windows 10 launch. It was the biggest drop for the PC industry in nearly two years.
According to Gartner, the top five PC manufacturers all experienced year-over-year declines, led by Taiwan-based Acer Group's precipitous 20.2% sales plunge. Considering that Intel's Client Computing Group accounts for the majority of its revenue, this news gave Intel bears more fodder.
What to watch
An 8% decline in PC sales in Q1 got much of the focus, but Intel's stellar 19% jump in data center sales should have stolen the show. Cloud computing is quickly becoming a huge market, with some estimates suggesting it will grow to nearly $400 billion in just five years.
For Intel, the shift to cloud-based data storage and analysis is right up CEO Brian Krzanich's alley as he transitions the company away from PCs to the technologies and solutions of the future. Krzanich credits Intel's data center results to the cloud, and there's no reason to think it won't continue to grow significantly in Q2 and beyond.
Another focus of the new Intel, and an area that should be front and center heading into Q2's earnings announcement, is its Internet of Things unit. Though still a relatively small piece of Intel's revenue pie, the $533 million in sales recorded in Q1 of 2015 was an 11% improvement over last year's $482 million, and that was a whopping 32% higher than 2013. Clearly, IoT is another area of potential hyper-growth for Intel, and like the cloud it is expected to become a massive market rife with opportunity.
Last but not least
In addition to focusing on cloud data centers and IoT sales, prospective Intel investors should also note that these two key areas are becoming a larger portion of total revenue with each passing quarter. In other words, Krzanich's transition plans are working.
In the first quarter of 2014, IoT and primarily cloud-based data center revenue accounted for 28% of Intel's $12.8 billion in sales. By Q1 2015, the combined revenue of the two divisions made up 33% of Intel's top line. Can it keep that trend up and demonstrate that its efforts to shift its focus away from PCs are still working?
Ultimately, continued success in these key areas is what will determine Intel's future. Let the industry pundits bemoan PC sales; if Intel delivers where it counts, particularly with its 3.2% dividend yield, it warrants a good, hard look from long-term investors.
Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Gartner 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.