Intel Stock Down, But Not Because Of PCs

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Intel Stock Down, But Not Because Of PCs
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Intel’s performance in the fourth quarter had been measured in terms of PCs sold in the holiday season. This time though, investors focused on another segment, but to their dismay, it did not perform well.

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Intel expected a slowdown

On Thursday, Intel released its earnings report, which beat expectations despite profits falling 1% due to ongoing weakness in the core PC business. This did not disappoint investors as they knew that PCs had a bad holiday season, but what they did not expect was the weak performance of the data center business.

According to FactSet Research, the Wall Street analysts expected Intel’s data center business to generate revenue of $4.43 billion, but it actually reported revenue at $4.3 billion, representing growth of just 5%. This is the slowest growth rate this year as the chip maker’s data center business made double-digit year-over-year revenue growth in the first three quarters of 2015.

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Intel did project slower growth in data centers in the fourth quarter. In October, Intel CEO Brian Krzanich issued a warning that purchases made in the holiday season often disrupt transaction-based systems of most e-commerce companies, and for this reason, they do not make purchases then.

Krzanich, who was satisfied with the fourth quarter results, said, “Our results for the fourth quarter marked a strong finish to the year and were consistent with expectations. Our 2015 results demonstrate that Intel is evolving and our strategy is working.”

Altera to help push growth, but later

Intel recently completed a major merger with Altera, resulting in high operating expenses for 2016. The chip maker had already forecast higher operating expenses, which, coupled with the data center shortfall, likely helped fuel the after-hours decline of 5% in its stock.

Intel’s $16.7 billion acquisition of Altera will help it push growth in the data center business. The chip maker also has plans to offer programmable chips jointly developed for servers. However, Betsy Van Hees, an analyst with Wedbush Securities, believes the merger will not show its impact on the data center business until the second half of 2016.

“It’s the long-run end game for them, like all the products showcased at CES,” the analyst said.

On Thursday, Intel shares closed up 2.62% at $32.74. Year to date, the stock is down by almost 5%.

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Aman is MBA (Finance) with an experience on both Marketing and Finance side. He has worked as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, reviewing tech gadgets, playing PC games and cricket. - Email him at amanjain@valuewalk.com
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