Why Intel's Rising Capital Expenditures Are Wise Investments

Semiconductor leader Intel invested aggressively during the past few years to secure its future. For many years prior, the company was heavily reliant on the personal computer for profits. To a certain extent, it still is, but its dependence on the PC is starting to drop. That's a good sign, because global PC shipments only recently stabilized after falling for several quarters in a row.

Fortunately, Intel is getting to work in new areas, such as putting its chips in smartphones and tablets. And Intel is making progress in an exciting new area known as the Internet of Things, or IoT. When combined, these areas represent the best hope for Intel to get back to high revenue and earnings growth in the years ahead.

Intel is putting money to work
Last quarter, Intel's capital spending increased 3.8% year over year, to $2.8 billion. In addition, research and development spending increased 13% during the first half of the year versus the same period the year before. All of this indicates that Intel is ready and willing to significantly increase spending in new areas. This was backed up by comments from management, in which Intel stated it would increase investment.

At Intel's last Investor Meeting, management announced it will be significantly increasing its spending on tablets, data centers, and the IoT. First, Intel presented its plan to increase investment in the tablet market by more than 75% in 2014, compared to two years ago. This is part of management's strategy to get Intel's chips in as many as 40 million tablets by the end of this year. During Intel's most recent quarterly conference call with analysts, Chief Executive Officer Brian Krzanich stated that the company was "squarely on track to our 40-million-unit tablet goal by shipping 10 million units in the second quarter."

Data centers and the Internet of Things
Outside of tablets, Intel is investing in other areas to help diversify and secure future growth. The company will increase its investment in data centers by more than 10% in 2014 to expand its footprint in networking, storage, the cloud, and big data. Intel is already reaping rewards from this, as its data centers group produced 15% revenue growth in the first half of the year.

Data centers are increasingly important for Intel. The company's data center group represents its second-largest operating segment by sales. Data centers represent one-quarter of Intel's total revenue.

Lastly, Intel needs to keep enhancing its presence in the Internet of Things, in which virtually all devices could be connected to each other via the Internet. Mobile, home, and embedded devices could all be connected to the Internet to integrate computing abilities. This would allow all these connected devices to share data over the cloud.

That's why Intel laid out its plan to increase spending in this area by more than 20%. Intel's processors will help businesses reduce costs and unlock valuable data from systems that weren't previously connected via the cloud. This is already starting to work in Intel's favor, as its IoT segment was the highest-growing business for Intel during the first half of the year. The IoT business generated 27% revenue growth during the first six months.

Intel's capital spending is right on the money
Intel is putting a lot of money to work in business areas such as tablets, data centers, and the Internet of Things. While this has put some pressure on margins during the past year, it's a necessary step to keep future growth intact.

Intel struggled with stagnating revenue and profits for many quarters due to lackluster PC shipments. Now that many of these investments are coming to fruition, the results are beginning to materialize.

After releasing its second-quarter results, Intel increased its full-year revenue expectations, thanks in large part to its higher-growth businesses. Intel now expects 5% revenue growth for the year, which is slightly higher than previous expectations. Going forward, Intel has a bright future thanks to its aggressive investments.

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The article Why Intel's Rising Capital Expenditures Are Wise Investments originally appeared on Fool.com.

Bob Ciura has no position in any stocks mentioned. 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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