More Concern from Investors Over Intel's Data Center Business, as Qualcomm Enters Server CPU Market

Witawat (Ed) Wijaranakula, Ph.D.
Tue Jan 19, 2016

Intel [NASDAQ:INTC] shares tumbled 9.1% on Friday to close at $29.27 a share, after the company said their revenues from its lucrative data center group (DCG), which makes microprocessors, chipsets, SoC and multichip packages that are used in servers, storage, and switches to power data centers and cloud computing, rose just 5.3% in the fourth-quarter 2015. Most analysts had expected previous double-digit percentage gains to continue, despite that Intel warned in their second-quarter 2015 earnings release that enterprise buying had cooled and they did not expect a large recovery for enterprises throughout the remainder of last year.

Giving Intel a run for its money, Qualcomm [NASDAQ:QCOM] just announced on Sunday that it had entered into an agreement with the Chinese province of Guizhou to create a joint venture called Guizhou Huaxintong Semi-Conductor Technology Co.. Qualcomm will own 45% of the joint venture, while the Guizhou provincial government's investment arm will own the remaining 55%. The news should come as no surprise, as Qualcomm announced plans in October to enter the server CPU market that Intel dominates, with a customer processor chip built using the ARM architecture.

For the fourth-quarter 2015, ended December 26, Intel reported total revenues of $14.9 billion, up 1.36% compared to $14.7 billion from the same quarter the previous year, and non-GAAP earnings of $0.74 per diluted share, flat compared to $0.74 per diluted share in the fourth-quarter of 2014. Intelís EPS got some tailwinds from a low tax rate, as their effective tax rate in the fourth-quarter 2015 was 16.0%, compared to 21.4% in the same period the prior year. According to Financial Times, analystsí expectations were earnings of $0.63 per share on revenues of $14.803 billion. 

For the full-year 2015, Intel reported revenues of $55.4 billion and EPS of $2.33, compared to revenues of $55.9 billion and EPS of $2.31 for the full-year 2014. Analysts' expectations were for earnings of $2.23 per share on revenues of $55.243 billion. Intelís 2015 effective tax rate was 19.6%, down 6.3 percentage points compared to the 2014 effective tax rate of 25.9%.

For the fourth-quarter 2015, Client Computing Group (CCG) revenue was $8.76 billion, down 1.24% year-over-year and Data Center Group revenue was $4.31 billion, up 5.3% year-over-year. Internet of Things (IoT) Group revenue was $625 million, up 5.75% year-over-year, while the Software and Services operating segment revenue was $543 million, down 2.51% year-over-year.

For the full-year 2015, Client Computing Group revenue was $32.22 billion, down 7.62% year-over-year and Data Center Group revenue was $15.98 billion, up 11.05% year-over-year. Internet of Things Group revenue was $2.3 million, up 7.28% year-over-year, while the Software and Services operating segment revenue was $2.17 billion, down 2.12% year-over-year.

Looking forward, Intel sees non-GAAP revenue of $14.1 billion, plus or minus $500 million, in the first-quarter ending in March 2016. Intel cut its 2015 capex forecast again, to $7.3 billion, plus or minus $500 million. Intel said its full-year capex spending forecast is $9.5 billion, plus or minus $500 million. The acquisition of Altera was completed in early fiscal year 2016, which means that 2016 guidance includes the expected results for the FPGA business. 

While Altera will emerge as a standalone unit called the Programmable Solutions Group, its products will be integrated with those from both the Data Center Group and the IoT Group. Intel once said that the company has a plan to create a hybrid Xeon-FPGA chip that will plug into a single processor socket. It is highly critical for Intel as Google, Facebook, Baidu, and others are now using graphics processor unit (GPU) chips, originally built for rendering graphics, to power the latest in artificial intelligence tools, including speech recognition, image recognition, and natural language processing. In fact, FPGAs could be much better devices to use in data centers for hardware acceleration than a GPU, as they consume less power.

From our long-term technical viewpoint, INTC is highly technical-traded and has been moving in a symmetrical triangle (SYM TRI) chart pattern since mid-2014. A head and shoulders (H&S) chart pattern emerged in early-2015, as investors were extremely bearish on Intelís PC and software business outlooks and took the stock down to test $24.98 a share, or the 61.8% Fibonacci retracement level, in late August 2015. By the end of October 2015, a reverse head and shoulders (R H&S) chart pattern emerged and INTC bounced back to above the $30 a share level. 

Last week, the stock plunged from $32.73 a share to $29.45 a share, or about the 38.2% Fibonacci retracement level, as concerns rose about a slowdown in demand for data center chips. The stock could pull back further and test the trendline support at around $26 a share, and eventually retest the August low at $24.70 a share, if two technical supports at $29.38 and $28.60 a share cannot hold.

Based on 38 analysts polled by the Financial Times, the stock has a one-year price target of $38 a share. Intel will release its first-quarter 2016 earnings report on April 19, 2016. Analysts are expecting revenues of $12.91 billion, up 9.08% year-on-year, and an EPS of $0.50 per share, up 21.8% year-on-year. The estimates may not include Intelís FPGA business. 

Disclosure: No Position in INTC.

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