Although Intel (INTC +0.79%) executives spend quite a lot of time these days on quarterly earnings calls trying to convince investors that they are becoming less dependent on the PC market, the truth is that more than 58% of the company's revenue last year was generated by its Client Computing Group, which mainly sells PC-bound components.
This percentage has been coming down as a result of both revenue increases in other areas -- data center, Internet of Things, non-volatile memory -- and outright declines in the overall PC market.
At any rate, with such large exposure to the PC market, the health of the overall market remains important to Intel's financial performance and, ultimately, its share price.
Unfortunately, according to a recent note from analysts with Pacific Crest (via Barron's), it would appear that PC sales are deteriorating at a much faster-than-feared clip. Let's take a closer look.
Notebook PCs down 32% month over month
The analysts have lowered their expectations for notebook PC unit shipments from contract manufacturers from 9.9 million, down 19% month over month as a result of seasonal weakness, to just 8.3 million -- a 32% plunge month over month.
The analysts claim that this decline is due to "excess inventory at PC OEM customers." As a result, the analysts have revised their notebook shipment estimates for the first quarter from 27.95 million, representing a 5% year-over-year decline, to just 25.85 million, or a fairly steep 13% year-over-year decline.
The rest of the year probably won't be this bad, but still ...
Although the rest of the year is unlikely to prove this bad for notebook and PC sales, it's disconcerting that the PC market seems to continue to deteriorate. Intel had originally forecast PC sales to be down slightly in 2016 but recently took down its full year guidance down as a result of a weaker-than-expected outlook.
I wouldn't be at all surprised if the company were forced to take down its full-year guidance when it reports its first-quarter results in April.
Now, I don't think the PC market for the year will see units down in the double digits, but a decline in the mid- to high single digits in PC units now seems within the realm of possibility.
Revisiting Intel CFO Stacy Smith's "napkin math"
At the company's most recent investor meeting back in November, CFO Stacy Smith showed investors what he referred to as "napkin math."
The purpose of this math was to demonstrate the sort of growth profiles that Intel can deliver to investors in each of the cases of a flat PC market, a PC market down about 5%, and a PC market down about 10%:
Source: Intel.
Per these estimates, as long as the PC market contraction doesn't dip below 10%, and assuming "mid-teens" growth in the Data Center Group and "historical growth" rates for the other businesses, Intel can still eke out organic revenue growth.
On the surface, this should mean that as long as the PC market doesn't get much worse from here on out, Intel should still be able to grow in 2016.
However, I don't believe that investors should take for granted that its Data Center Group can actually grow at a "mid-teens" rate -- and this is by far the most important offsetting factor in this "napkin math".
Indeed, since 2011, Intel has only managed to meet/exceed its goal of 15% revenue growth in Data Center once, and that was in 2014. In 2011, 2012, and 2013, Intel saw between 6% and 9% growth in this business, and in 2015 it grew 11%.
If the same macroeconomic factors that cause Intel's PC business to come in worse than expected also negatively impact its Data Center business, then all bets are off with respect to the company's growth.
I'm more cautious on Intel stock
Over the long-term, I like Intel's non-PC businesses and think they are poised to grow in the years ahead. However, the PC market seems to not be able to catch a break. It's hard to fault Intel for its execution within PC the business, but this is truly a classic case of a "great house in a bad neighborhood."
Eventually the other businesses should grow so large that PC declines just don't hurt as much, but for now -- given how much of Intel's revenue, unit volume, and ultimately operating profit -- come from sales of PC chips, I can't help feeling a little more uneasy about the prospects for Intel stock over the next year or so.
