Please ensure Javascript is enabled for purposes of website accessibility

Why Server Sales Should Have Intel Corporation Investors Smiling

By Tim Brugger - Mar 15, 2016 at 12:20PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The chip king’s transition to new, fast-growing markets is taking hold, and the timing couldn’t be better.

The past month has been kind to Intel (INTC -1.30%) shareholders, thanks in large part to a general uptick in global markets. Despite the 10% jump in share price since February, in the minds of many investors and industry pundits, Intel's fortunes remain tied to a dying PC market. The perception that Intel's fortunes still lie with PCs explains why analyst's consensus price target is just $36.05, equal to a solid, if not spectacular, 13% upside.

Like other tech behemoths, Intel was admittedly slow to transition to new markets, including the cloud, the Internet of Things (IoT), and mobile, but CEO Brian Krzanich's mission when he took the helm was to remedy that situation. Though analysts have yet to fully buy in, Krzanich has Intel headed in the right direction. And based on 2015 server sales data, Intel's transition will take another step forward in 2016.

Just the facts
According to data from Gartner, 2015 ended with a bang for server manufacturers, continuing what had already been a banner year. In Q4, server revenue jumped 8.2% to $15.13 billion, and shipments grew by over 9% to just shy of 3 million units. Sound results to be sure, and the numbers look even better for the year.

Thanks to the growth of "hyperscale data centers," server revenue for all of 2015 increased 10.1%, and shipments grew 9.9%. The data center growth Gartner refers to is being driven by large, information-intensive companies with a need to store, analyze, and ultimately utilize the unprecedented amount of data that a "connected," digital world generates.

The need for data centers is also being driven by providers betting big on two of the industry's fastest-growing markets: the cloud and IoT. Much of the data housed in the cloud will be generated by IoT sensors and devices, a market some estimate will mushroom to over $14 trillion in the next six years. Great news for cloud and IoT providers, but what's that have to do with Intel? In short, everything.

Image source: Intel.

Why it matters
When Intel announced 2015 Q4 and annual earnings, naysayers were quick to point out the 1% drop in sales from 2014's $55.9 billion to "just" $55.4 billion last year because of an 8% drop in its client computing group. Total Q4 sales increased slightly, but based on Intel's 9% drop in share price following earnings, investors were not impressed.

What some missed is that Intel had a record-setting quarter and year where it matters most: its data center and IoT groups. As two of Krzanich's key initiatives, Intel's data center and IoT unit results should be at, or near, the top of a growth and income investor's check list. For the year, Intel increased sales of its data center solutions by 11% to $16 billion, and IoT revenue improved 7% to $2.3 billion. Combined, the two units now represent a third of Intel's sales.

Even Intel's mobile ambitions are looking up. Rumor has it Intel may have inched its way into Qualcomm's (QCOM -1.04%) world as a key supplier for the wildly popular iPhone line-up. Some analysts have suggested Intel has garnered between 20% to 30% of the iPhone modem market. But Intel's mobile plans don't end with trying to unseat Qualcomm.

Wearables are the ultimate in mobile, and Intel has already inked deals with clothing, shoe, and watch manufacturers, to name but a few. Intel's Curie, its "microcomputer the size of a button" module, is just one of its latest wearable wonders. However, as important as Intel's mobile ambitions are, its future is still tied to data centers and IoT.

As Krzanich put it, "Our 2015 results demonstrate that Intel is evolving and our strategy is working. This year, we'll continue to drive growth by powering the infrastructure for an increasingly smart and connected world." At some point, investors will recognize what's driving Intel's future, and it's not PCs.

As compelling as Intel's fast-growing data center and IoT results are, it has a couple more aces up its sleeve. At 3.27%, Intel's dividend yield is one of the highest around. And at just 12 times forward earnings, Intel warrants a long look for those in search of value, growth, and an industry-leading dividend.

 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Intel Corporation Stock Quote
Intel Corporation
INTC
$37.29 (-1.30%) $0.49
QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
QCOM
$130.23 (-1.04%) $-1.37
Gartner, Inc. Stock Quote
Gartner, Inc.
IT
$240.14 (0.30%) $0.73

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
319%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.