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Intel (INTC) Stock 1Q Earnings Preview: Beat or Miss?

Intel INTC will report first quarter 2016 earnings results after the bell on Apr 19. The company has a Zacks Rank #3 (Hold) and earnings ESP of 4.08%, meaning that there’s a reasonable chance that it will beat estimates this quarter. Generally, Buy (Zacks Ranks #1 and #2) and Hold rated stocks when combined with a positive ESP indicate chances of an earnings beat, while sell-rated stocks (Zacks Ranks #4 and #5) are best avoided.

In Intel’s case, we also see a good track record, i.e. positive surprises in each of the last four quarters averaging 9.61%.

What Are The Negatives?

But to say that all is well at chipzilla may not be correct because there are some real challenges it continues to battle.

The most obvious is the secular decline in the PC market. Both IDC and Gartner reported March quarter numbers that weren’t exciting. Gartner said that PC shipments in the quarter fell 9.6% year over year to 64.8 million units while IDC said that they fell 11.5% to around 60.6 million units. The difference in total numbers is because the firms have slightly different measurement criteria. But whichever way you look at it, the market is not doing good and isn’t likely to do better in the near term. Intel, which generates 59% of revenue from the market, will definitely feel the pinch.

As for the data center business, there’s no disputing Intel’s leadership position here as well as its clout with several big spenders that allow it to sell custom chips at high margins. But Facebook’s FB Open Computing Platform can develop into a bit of a headache and Alphabet GOOGL developing alternative solutions is nothing to cheer about. NVIDIA NVDA is also very strong on the HPC front, which can be a hindrance to Intel’s progress in that segment.

In fact, when Intel announced that it was going to report results for its Non-Volatile Memory Solutions Group (NSG), Intel Security Group (ISecG) and Programmable Solutions Group (PSG) separately, some of us were left wondering whether this was a ploy to distract us from the core business, which may be expected to do much weaker for the above-mentioned reasons.

So What Is Driving Intel’s Results?

First, on the computing front, Intel is likely to benefit from the enterprise deployment of Windows 10 later this year. In the meantime, the company has been introducing new products for both consumer and enterprise customers to keep people interested in notebooks. Whether it will succeed or not is unknown, but it may be able to mitigate the damage to its business.

On the data center side, Intel has new Xeon chips and SSDs. It also has new capabilities with Altera integration though integrated products may not hit the market for some time. It is also growing its capabilities in software defined infrastructure. These initiatives should help it grow in the data center and take share in the fast-growing cloud computing segment. Since the cloud segment is really large, Intel may be able to maintain its own growth rates.

There is also a lot of opportunity in the Internet of Things (IoT) segment. The recent acquisitions of Arynga and Yogitech will help it get into the connected car. Other areas it is investing in include 3D body-scanning, biometric sensors, wearables and IoT infrastructure. The market is still relatively nascent, but The World Economic Forum reportedly forecasts the number of embedded devices to grow at a CAGR of 21.6% from 22.9 billion in 2016 to 50.1 billion by 2020.

Of the three new segments it is breaking out, we already know that memory is growing very strongly (although 3D XPoint is some way off), while the other two are lesser known. It will be good to get additional color on them.

Bottom Line

Intel should top estimates again this quarter, with data center and other segments largely offsetting the continued softness in computing.    

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