Intel's Multi-Year Growth Spurt Is Just Up Ahead

Intel's Multi-Year Growth Spurt Is Just Up Ahead

It's no secret that Intel hasn't exactly been a stellar investment over the last two years. While 2012 showed plenty of promise - particularly as management had guided to 7%-9% top-line growth off of an already impressive $54 billion 2011 revenue base - the PC market, as well as the enterprise spending environment, fell off much more rapidly than expected. As a result, Intel posted a 1% top-line decline on a year-over-year basis, and saw net income decline by 12%.

When it came time to issue guidance for 2013, Intel called for a rather modest "low single digit" increase on the top line (that's 1%-3%) and a 210 basis point decline on the gross margin front from 62.1% to 60%. This gross margin decline was largely attributable to excess capacity charges as well as start-up costs for the company's 14 nanometer manufacturing technology. Not great, but certainly not the doomsday story that many have been spooked into believing.

Unfortunately, Intel ran into yet another snag thanks to a weaker-than-expected PC demand environment and had to adjust guidance down from low single digit growth to flat year-over-year (plus or minus 2%). While the datacenter story is intact, and while the company is on the eve of the launches of a whole flurry of new smartphone and tablet products, these are not going to be enough to drive meaningful growth for the year.

Mobile starts to kick in during 2014
I believe that investors should be pretty excited for what Intel has in store for 2014. To that end, I would like to detail the key drivers that I believe will be the heart of the long-term Intel story beginning next year.

First, Intel will have a full year of participation in the tablet market. While Intel's "Clover Trail" and "Clover Trail+" platforms helped to drive its tablet market share to about 4%-5% (driven largely by Windows compatibility), these platforms were not particularly competitive, and as a result Qualcomm took the lion's share of the Android tablet market during 2013.

Exiting 2013, and for the entirety of 2014, Intel will finally begin to leverage its design and manufacturing expertise to have competitive tablet processors on the market, beginning with "Bay Trail" this fall (which should be very competitive with its competition on performance and power) and continuing with "Cherry Trail" during around Q3 2014. With only two major competitors in this space, and with some very real business advantages, I'm expecting market share in tablets to grow to at least 20% for 2014 if not to much more.

Of course, we can't forget smartphones. While "Medfield" in 2012 and "Clover Trail+" in 2013 served to dispel the myth that Intel couldn't develop products that could comfortably fit in a smartphone power envelope, two critical ingredients were missing that should be in place by the end of the year.

First and foremost, Intel will finally have an LTE solution. While Intel's 3G modems are quite popular outside of the United States, particularly in lower end phones, it has lacked a 4G LTE solution. In order to sell a phone in any developed market, and in particular the United States, LTE is a "must have" feature. While processing power is important, smartphones are ultimately limited by their connectivity speeds, and no customer is going to want a phone that can't do LTE.

But Intel hasn't exactly had leadership processing power in smartphones, either. While "Clover Trail+" brought a respectable dual core solution, it has been out-classed by the likes of Qualcomm's Snapdragon 600 and now its successor the Snapdragon 800, both of which offer superior CPU and graphics performance. Intel's upcoming "Merrifield" platform, which has a brand new CPU based on Intel's 22nm FinFETs, coupled with its LTE modem, should help even the score in higher end handsets.

The datacenter continues to be interesting throughout 2014
One bright spot for Intel has been its datacenter group. This division continues to execute nearly flawlessly as it continues to gain market share across the board. Further, while Intel was late to the mobile game, it was actually early to counter the ARM micro-server threat. In fact, the company just launched its "Avoton" and "Rangeley" processors based on the "Silvermont" low power processor core in a complete, low power system-on-chip.

I believe that the underlying secular growth in the datacenter continues, but more importantly, I believe that Intel will maintain share in its traditional areas while expanding into new ones such as cold storage, networking, and communications infrastructure. Intel's roadmap looks good, and it has many key technological and business advantages to effectively fend off threats from the numerous ARM-based upstarts.

The PC makes this tricky
The only tricky part of this thesis is the continued decline of the PC. While Intel's participation in tablets and smartphones is a major positive that should help drive revenue growth, these effects could be significantly muted by declines in the PC space. Keep in mind that this business is still worth about $34 billion in annual sales and as long as it keeps falling, Intel's top line story will be quite muted.

My guess is that in 2014, the end of Windows XP support should help to drive an enterprise refresh cycle. More broadly, I'm hoping that as Intel's "Haswell" ramps, and as "Bay Trail-M" (a low power, Atom based PC chip for fan-less laptops) enters the market, improved battery life, form factor, and price points could help reignite PC volume growth. All told, I'm looking for Intel's 2014 PC sales to be within 5% of 2013's numbers (so nothing ultra-bearish or bullish).

The Foolish bottom line
With a near 4% dividend yield and on the cusp of a whole slew of new products that have been many years in the making, Intel looks very attractive today. If I'm right, Intel should benefit from a multi-year growth spurt beginning in 2014 and extending out for as long as servers, tablets, and smartphones continue to grow.

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Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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