Apple Inc. (NASDAQ:INTC)’s recent earnings announcement was a disappointment, but not by much. The company was able to generate results that were not as bad as anticipated. Analysts, on a consensus basis, were anticipating earnings per share of $0.41. The company reported earnings per share at $0.40.
Data centers are where it is at
On the bright side, the data center segment has been able to grow revenues by 7.5% year over year. The year over year growth is not a surprise as industry experts anticipate growth in cloud computing. Cloud computing players like VMware, Inc. (NYSE:VMW) have been able to grow earnings by 30% on average over the past five years and believes that cloud computing will be a $210 billion industry by 2016 and that 74% of business applications will be in the cloud by 2017. International Business Machines Corp. (NYSE:IBM) has been able to stake a large claim in business software in the cloud, along with cloud based solutions. International Business Machines Corp. (NYSE:IBM) should be a closely watched bellwether for server growth, and whether or not Intel’s data center segment will be able to sustain growth.
Desktop computers are fading into the background
Intel’s PC client group revenues declined by 6.6% over the previous fiscal year. Revenues from laptops and desktop computers have both been declining, due to longer upgrade cycles. Consumers feel less compelled to upgrade their desktop computers because the benefits of a faster processor and better operating system (Windows 8) are diminishing.
Product obsolescence due to product failures may prompt customers to buy another computer. But durability, along with increasing usage of the Internet for access to applications is going to diminish the need for faster-computing over the short-term. This should cause Intel’s earnings to decline for a prolonged period in the PC client group. A potential earning catalyst going forward is the product road map that Intel has laid out for itself in mobile computing. But, QUALCOMM, Inc. (NASDAQ:QCOM)’s near dominant market share keeps me a cautious skeptic of Intel’s advances into mobile processing.
Intel was hoping that mobile would bail it out
Intel’s architecture segment reported revenue declines of 3.9%. The decline in revenues in this segment is somewhat alarming because its product portfolio is composed of processors for tablet, mobile phones, and netbooks. Analysts are hoping for a rapid deployment of Intel processors in the mobile space, but I would hold my breath as there are already well-established competitors in the space that Intel wants to compete in. Intel may have some of the world’s most talented engineers along with a large stack of patents, but that doesn’t change the fact that ARM Holdings plc (ADR) (NASDAQ:ARMH), QUALCOMM, Inc. (NASDAQ:QCOM), and Samsung Electronics Co., Ltd. (KRX:005930) have been developing chips for smaller devices for much longer. Intel also faces stiff competition from NVIDIA Corporation (NASDAQ:NVDA) as well, while Advanced Micro Devices, Inc. (NYSE:AMD) is absent from the mobile space. In fact, AMD is minding its own business developing processors for the next-generation console systems.
Is Intel’s distribution channel a disaster?
Intel was relying heavily upon the success of Microsoft Corporation (NASDAQ:MSFT), and Microsoft’s Surface. Microsoft’s Surface is uninspiring. It’s just a Windows 8 laptop with a smaller screen and an Intel processor thrown in. What made the iPad stand out was the concept behind Apple Inc. (NASDAQ:AAPL)‘s marketing push. Consumers want a bit of novelty with their consumer electronics purchase, and Microsoft doesn’t actually provide any of it.
The tablet is a consumer electronics device aimed at satisfying basic entertainment needs which may involve reading a book, listening to music, and watching YouTube videos. Perhaps answer the occasional e-mail. What Microsoft’s Surface tries to appeal to is the office crowd — it’s like the Blackberry of tablet devices.
Microsoft’s Surface generated mixed signals. Microsoft’s foray into tablets wasn’t that huge of a financial success. The Microsoft Surface generated 1.5 million sales according to the latest Bloomberg estimate. According to the same article, Apple was able to sell 22.9 million iPads in the same period. Microsoft’s positioning with its Intel i5 processor, and office features drummed up a muted response from consumers. So much for being cool.
Intel may not manufacture chips for Apple Inc. (NASDAQ:AAPL) for quite awhile despite all the rumors surrounding Intel and Apple’s marriage in the foundry business. Apple is paying some fairly reasonable prices to Samsung and Samsung’s chips work well enough. If Apple Inc. (NASDAQ:AAPL) was to transition to a different chip manufacturer; it would go with Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) rather than Intel. So Intel’s foundry business isn’t likely to generate any press or revenues from Apple in the foreseeable future.
Apple Inc. (NASDAQ:AAPL)’s recent quarter was difficult from a margin standpoint, which is unrelated to the foundry that Apple Inc. (NASDAQ:AAPL) chooses to manufacture chips with. Apple Inc. (NASDAQ:AAPL)’s gross margins declined from 46.5% to 37.5%, Apple’s decline in gross margins were driven by cost of sales increases from $20 billion to $27 billion while revenue growth remained essentially flat at 11% year-over-year. The iPad Mini caused the gross margins to compress which further squeezes competitors like Barnes & Noble, Inc. (NYSE:BKS), Amazon.com, Inc. (NASDAQ:AMZN), and Microsoft out of the tablet marketplace. Apple’s iPad revenues grew by 40% year-over-year.
With Intel missing out on Apple Inc. (NASDAQ:AAPL)’s success in tablets, along with Microsoft and Amazon.com, Inc. (NASDAQ:AMZN) struggling to gain any significant foothold in both the low- and high-end tablet space, Intel’s mobile strategy could turn into a financial failure.
Guidance and outlook
Intel provides guidance that the company should be able to generate revenue growth in the low single digits. Analysts on a consensus basis anticipate revenue growth of 0.70% for fiscal year 2013. Intel believes that desktop shipments will eventually stabilize. Microsoft’s new operating system may lead to a product refresh cycle that should help stabilize revenues. However, analysts on a consensus basis are expecting earnings to come in at -10.80% for the current fiscal year. Intel’s Haswell platform launch for tablets has been a disaster. The product’s performance is comparable to its competitors. If no major mobile manufacturer (outside of Microsoft) is willing to implement the Intel processors into its tablet products, Intel will not be able to recoup the R&D costs.
I’m a cautious skeptic of Intel’s performance going forward. While analysts expect earnings growth of 7.90% in 2014, I wouldn’t want to hold onto Intel. There’s no real growth story in the stock, and while the 4.11% dividend yield is extremely attractive, Intel’s earnings hinge on whether or not it can succeed in the mobile space. If it doesn’t succeed in a timely manner, investors could panic, and dump the stock. I don’t find the risk to reward ratio very appealing.
The article Apple Will Shun Intel originally appeared on Fool.com.
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