When Gartner confirmed that PC sales declined yet again in the first quarter of 2016, Intel and tech brethren Microsoft weren't punished as has so often happened in the past. In fact, just the opposite. Does that mean investors, at long last, recognize that the respective transitions that the tech giants are undergoing are taking hold? If so, it would certainly bode well for Intel and Microsoft shareholders, because PC sales aren't likely to make a miraculous comeback anytime soon.
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Image courtesy of: Intel.
Just the facts
As per Gartner, there were 64.8 million PCs shipped in 2016's first quarter, a whopping 9.6% drop from 2015's Q1. As if the year-over-year decline wasn't bad enough, last quarter was the first time in nine years that shipments fell below 65 million units. The strong dollar played a role, as did the precipitous 32.4% decline in PC shipments in Latin American markets.
Another factor pressuring PC sales -- which Gartner defines as desktop units, notebooks, and ultramobile premium devices (tablets and clamshells) -- is the shift to smartphones. Particularly in emerging markets, more and more consumers look to lower-cost smartphones as their primary computing device.
The only aspect of Gartner's report that could be viewed as even mildly surprising was the depth of the PC decline. Not long ago, such discouraging PC sales figures would have sent Intel's and Microsoft's stock, among others, into a tailspin. As it happens, in the couple of days following Gartner's dismal PC news, Microsoft stock rose about 2%, while Intel shares climbed nearly 1.5%.
Now, for the rest of the story
Intel's recently announced Q1 earnings support CEO Brian Krzanich's view that, "Our first-quarter results tell the story of Intel's ongoing strategic transformation, which is progressing well and will accelerate in 2016. We are evolving from a PC company to one that powers the cloud and billions of smart, connected computing devices."
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Total revenue jumped 7%, and even Intel's client computing group, home of its PC-related sales, eked out a 2% year-over-year revenue increase. But the real news was the 9% and 22% jump in Intel's data center and IoT sales, respectively.
Add Intel's 12% increase in security revenue -- another key component of Krzanich's transformation plans -- to data center and IoT, and the three units combined to make up nearly 40% of Intel's $13.7 billion in total sales. News that Intel intends to cut 12,000 jobs -- equal to 11% of its workforce -- due to the aforementioned PC slowdown hasn't hindered its solid start to 2016.
Microsoft's transformation efforts, much like Intel's, are centered on the cloud. CEO Satya Nadella is also focused on getting Microsoft's Software-as-a-Service offerings, including its flagship Office 365 and Dynamics CRM, into as many devices -- mobile or otherwise -- as possible, regardless of operating system. Based on its nearly 11% increase in share price in the last three months, and its slight pop following Gartner's data on the Q1 PC sales decline, investors have bought into Nadella's "mobile-first, cloud-first" transition mantra.
Heading into its fiscal 2016 Q3 earnings on April 21, Microsoft will likely surpass the $10 billion annual cloud revenue run rate. As of last quarter, Microsoft was already generating more than $9.4 billion cloud sales and has consistently reported significant improvements with each successive quarter. Microsoft's strength in SaaS delivered via the cloud, considered by most pundits as the fastest sector of the exploding market, is largely responsible for its leadership position.
Investors are beginning to recognize that declines in Microsoft's personal computing division, home of its PC sales, no longer define the cloud software king. The initial reaction by investors to Gartner's PC sales report was a good sign of things to come for both Intel and Microsoft. Slowly but surely, investors are getting on board Intel's and Microsoft's transformations, which makes each a sound, long-term growth opportunity.
The article Is This a Bullish Sign for Microsoft Corporation and Intel Corporation? originally appeared on Fool.com.
Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Gartner. The Motley Fool owns shares of Microsoft. The Motley Fool recommends 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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