At microprocessor giant Intel's (NASDAQ: INTC) most recent investor meeting, company CFO Bob Swan gave a presentation digging deep into the company's current financial position as well as its expectations for future financial performance. Indeed, during that presentation, Swan gave what essentially amounted to preliminary financial guidance for the next three years.
Continue Reading Below
Let's go over it, and what it means for investors.
Modest revenue growth
Swan said that the company is betting that its client computing group (CCG), which sells personal-computer processors and other related technologies like Wi-Fi chips and cellular modems, will contract at a "low single digit" pace.
A wafer of Intel's seventh-generation Core processors. Image source: Intel.
Serving to offset that, though, will be "double-digit" growth in the collection of businesses that the company refers to as its "growth" businesses -- i.e., the data center group (DCG), programmable solutions group, non-volatile memory solutions group, and Internet of Things group.
Continue Reading Below
Netted out, the company expects to enjoy an average of "low-single-digit growth," which I take to mean 1$-4%.
Profit growing faster than revenue
Turning to profitability, the company expects its gross profit margin percentage to "decline modestly," though it does anticipate staying in the "top half" of the company's historical 55%-65% gross profit margin range.
As far as overall profitability goes, Intel expects declines in operating expenses as a percentage of revenue, thanks to both research-and-development "efficiency" and sales, general, and administrative "leverage."
Those two factors combined lead the company to project that its operating income will grow at a quicker pace than revenue does, though the company didn't give further specifics.
And, finally, Intel says it expects earnings-per-share growth to outpace operating income growth as it potentially engages in "opportunistic" stock repurchases, shrinking the overall share count and boosting earnings per share for a given level of net profit. It also anticipates enjoying returns from its Intel Capital investment portfolio and seeing its effective tax rate go "flat or down."
What this means for Intel stock
At this point, it's probably hard for growth-oriented technology investors to get too excited about what Intel expects over the next few years. Low-single-digit growth and slightly faster operating-profit and earnings-per-share growth are not the right ingredients for a compelling growth stock.
Perhaps the biggest potential source of upside for Intel stock at this point would be if the company were to come out and outperform its current revenue and profit expectations, particularly in its two largest businesses -- DCG and CCG.
For DCG, the company expects to be able to achieve low-double-digit revenue growth from 2017 through 2021, though there's a lot of wiggle room within "low double digit," since, after all, it's a range that spans 10% to 14%. The closer to the high end of that range Intel's DCG comes in, the better Intel's revenue and financial performance over that time should be.
Additionally, while Intel is calling for CCG -- its largest business by revenue -- to decline at a low-double-digit rate over the next three years, it's worth pointing out that the company posted modest revenue growth in CCG during 2016.
Whether Intel can manage to grow this business at a greater rate than it's currently expecting is largely out of its control, given this business unit's high dependence on the personal-computer market. But if it can, then the chipmaker could deliver better revenue and profit growth than it's currently expecting.
There's also always a risk that these businesses will perform worse than expected because of unexpected industry conditions, more intense-than-expected competition, and so on.
For now, I expect the stock price to largely reflect investor expectations in line with Intel's guidance. I'd expect major downside or upside moves primarily if it becomes clear that Intel's three-year guidance is either too optimistic or too conservative, respectively.
Offer from The Motley Fool: The 10 best stocks to buy now
Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the S&P 500!*
Tom and David just revealed their ten top stock picks for investors to buy right now.
*Stock Advisor returns as of 1/30/2017