Intel’s Transformation Has Prepared It For A Good Year

by Trefis Team
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Nvidia (NASDAQ:NVDA) may be leading the semiconductor chip industry’s disruption, but Intel (NASDAQ:INTC) has gotten on board as well. In 2017, Intel’s data-centric businesses, which include data centers, internet of things, and programmable solutions, expanded faster than its other businesses combined. Their revenue contribution increased from 36.2% in 2016 to 38.4% in 2017. This percentage increase was even more prominent in Q4’17, suggesting that the shift may be accelerating. Why is this important? The future of computing will rely increasingly on the use of big data and machine learning / artificial intelligence applications. Nvidia has been leveraging the parallel processing advantage of its GPUs to capture this huge and growing market. Now, Intel is also pursuing it with products such as its Nervana neural network processor, Movidius vision processing unit and Xeon scalable processors. The charts below show the changes in Intel’s data-centric businesses in 2017.

Profitability Is Improving Too

The aforementioned business focus has been accompanied by significant improvement in Intel’s profitability. While the company’s revenue grew 5.7% in 2017, its EPS grew nearly 27% and this margin expansion was seen across segments. This can be attributed to significant improvement in average selling prices. Overall, we believe that Intel is poised for another solid year, as far as revenue growth is concerned. However, we expect that EPS growth is likely to slow down somewhat as there will be significantly less room for further margin improvement.

Security Concerns Could Be A Damper

Intel recently acknowledged security issues with its hardware, related to the Spectre and Meltdown threats. Although these issues have affected AMD’s chips as well, the potential threat appears to be relatively greater for Intel. The company’s Client Computing Group & Data Center Group are by far the biggest business segments, and account for nearly 85% of Intel’s revenue. These segments could see some revenue pressure due to security concerns.

There is a chance that client relationships could suffer, or clients may delay purchases until Intel solves the security issue, which may happen by late 2018 as it launches new products. We have created an interactive dashboard where you can create scenarios and test how Intel’s 2018 revenue and earnings may be affected by this issue, and see the consequent impact on its price estimate.

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