Chip giant Intel (NASDAQ: INTC) has had a rough year, to say the least. The stock is down 19% since the beginning of the year. Intel is having a very hard time growing as the broader PC industry continues to decline, and the company’s growth markets are beginning to slow.
Intel shareholders got some good news when the company released better-than-expected second-quarter earnings Wednesday after the closing bell. The company beat expectations on earnings per share and met estimates on revenue.
As a result, the stock jumped about 8% in after-hours trading. Unfortunately, the stock then lost all the gains when the market opened Thursday.
While the Intel earnings report gave the market an immediate sigh of relief, there are still two underlying questions that likely caused investors to rush for the exits on Thursday.
Question No. 1: Will PCs Recover in the Second Half?
The biggest reason why Intel isn’t growing is because the PC industry continues to decline. According to tech research firm IDC, worldwide PC shipments declined 11% in the second quarter. The economic slowdown in emerging markets such as China, the upcoming free release of Microsoft’s (NASDAQ: MSFT) Windows 10, and the general continued shift in computing to mobile devices like smartphones have all contributed to falling PC sales.
This is a big worry for Intel, because its combined PC and mobile businesses make up more than half of its total revenue, and PCs are the bigger contributor by far.
Because of this, Intel’s client computing division posted a 14% year-over-year decline in quarterly revenue. Unless the broader PC industry recovers significantly over the back half of the year, it will be very hard for Intel to grow.
Question No. 2: Are Intel’s Growth Markets in Danger?
The bull case behind Intel previously was that even though its core PC business was in decline, it could make up for that by growing at high rates in its faster-growing businesses – namely, data centers and the Internet of Things.
However, now even these areas are looking weak. Intel grew year-over-year revenue in the Internet of Things business by just 4% last quarter. Data centers were better, at 10% revenue growth, but this represents a significant slowdown. Intel grew data center revenue by 19% last quarter.
One positive note is that the company’s gross margin is widening. Gross margin is a critical metric for technology companies like Intel, because investors are constantly worried since semiconductors often behave like commodity businesses. Maintaining pricing power is vital to Intel’s growth.
Last quarter, Intel generated a 62.5% gross margin, up two full percentage points from the same quarter last year. And it expects gross margins to expand further this quarter, to 63%.
This is at least a sign that Intel’s shift toward higher-margin products like data centers is helping to offset the weakness in lower-margin PC sales. Still, the overall results also count. Intel forecasts another poor year in 2015.
Intel Is in a Tough Spot
With the PC market in steep decline and Intel starting to slow in its key growth businesses, it’s no surprise that the company reduced its full-year forecast. It now expects total revenue to decline by 1% this year, versus previous guidance of flat revenue.
The bright side is that Intel is a cheap stock and pays a strong dividend yield. The stock trades for 12 times earnings and offers a solid 3.2% yield. This may keep shareholders happy, or at least those who are content with a dividend and not much else.
Investors should not expect much growth out of Intel, unless the PC industry recovers significantly over the following months.
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