Though some industry pundits were excited that Intel (NASDAQ:INTC) was able to meet revenue and earnings expectations in its recently announced Q2, others were quick to point out the decline compared to the year-ago quarter thanks to a weak PC market. Based on its anemic stock price movement since announcing earnings on July 15, investors appear to be uncertain of how to react to Intel's second quarter as well. And therein lies the opportunity.
As noted in a recent article, the Street's continued focus on the impact of the declining PC market is akin to looking in the rearview mirror as it relates to Intel. CEO Brian Krzanich made it clear when he took the reins from former chief Paul Otellini in May of 2013 that Intel was going to transition to new, cutting-edge markets including cloud computing, mobile, and the Internet of Things. Over the long haul, success in these high-growth markets will determine Intel's future, and Q2 saw yet another step -- albeit a smaller one than hoped for -- in the right direction.
Same story, different quarter
As with its much smaller brethren AMD (NASDAQ:AMD), the week leading up to Intel's earnings announcement was rife with negativity. Some of that angst was brought on by Gartner releasing its second-quarter PC sales results that turned out to be even worse than expected. The 9.5% drop in PC shipments was the largest decline in nearly two years.
Thankfully, Intel didn't miss already lowered expectations as AMD did, thanks in part to its focus on expanding its revenue sources beyond PCs. AMD is also trying to move beyond its reliance on PCs by growing its graphics sales, but as its 35% drop in year-over-year revenue demonstrates, it has a long, hard road ahead. Intel's sales declined in Q2 as well, to $13.2 billion from last year's $13.8 billion, but that was a tolerable 5% drop due to its revenue diversification efforts.
Intel naysayers may also note that its earnings of $0.55 a share, which matched last year's results, were as much about its significantly lowered tax rate -- a mere 9.3% compared to 2014's 28.7% -- as it was about revenues. It is certainly a valid point, but there's more to the Intel story.
Solid where it counts
Perhaps the area with the most potential for Krzanich's "new" Intel lies in its cloud-based data center group. According to some recent data, 42% of IT leaders are planning to increase spending on cloud-related technologies this year, driving total sales to well over $100 billion, a conservative estimate that is expected to nearly double in just three years.
As more private and public consumers shift their data storage and analysis to the cloud, the need for larger, more powerful data centers will continue to grow, and that's where Intel shines. Last quarter's $3.9 billion in sales was a 10% jump over 2014's data center revenues and up 5% sequentially. Intel's IoT division also grew, but not as robustly as some may have expected.
At $559 million in sales, Q2's IoT results were a 4% improvement over 2014 and a 5% increase from 2015's first quarter. But before the Intel bears get too excited, it's worth noting that the IoT market is in an even earlier stage than the cloud. And like the cloud, the IoT market as a whole is expected to explode over the next four to five years, and Intel is at the forefront of this huge opportunity.
Perhaps most telling was the combined makeup of Intel's $13.2 billion in sales last quarter. One of the highlights of its first quarter was the fact that 33% of Intel's revenues were derived from the combined results of its data center and IoT groups. This quarter? That percentage rose to 34% and year over year is even more impressive.
Data center group revenues alone accounted for just shy of 30% of revenues last quarter, up from just 23% two years ago and 26% last year. In other words, Krazanich and team are executing in the areas that matter. And thanks to a strong balance sheet -- Intel is sitting on about $7 billion in ready cash, equivalents, and short-term investments compared to last year's $5 billion -- its 3.26% dividend yield isn't in any danger of declining anytime soon. That should be music to the ears of growth and income investors.