Intel Corporation Expects Memory Business to Surge More Than 20% in 2017

By Ashraf Eassa Markets Fool.com

One market that microprocessor giant Intel (NASDAQ: INTC) expects to help boost its growth in the coming years is non-volatile memory. Non-volatile memory refers to types of computer memory that retain the data that they store even when the power to them is cut.

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So, for example, the storage medium inside of your smartphone -- NAND flash -- is an example of non-volatile memory because all your songs, videos, and apps remain stored on that memory even when you turn your phone off and turn it back on again.

Intel's 3D XPoint memory. Image source: Intel.

With respect to non-volatile memory, Intel has two real plays. The first is that it aims to be a leading vendor of NAND flash used in certain applications such as data centers as well as notebook and desktop personal computers. The second is 3D XPoint, a new type of non-volatile memory co-developed by Intel and Micron.

3D XPoint is supposed to be much faster than NAND (though more expensive and harder to manufacturer than NAND) and it's supposed to be cheaper than DRAM, a type of fast volatile memory that's found inside virtually every computing device today. 3D XPoint is aimed at both storage applications as well as DRAM-replacement in certain enterprise server workloads.

At Intel's investor meeting, the chipmaker said that it expects revenue from its Non-Volatile Memory Solutions Group (NSG) to grow by more than 20% in 2017. Let's dig further into the details.

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What is Intel's NSG, exactly?

In the preceding discussion, I said that 3D XPoint can be deployed as either a fast type of storage or as a DRAM replacement. When Intel sells 3D XPoint products as storage devices, those revenues are recorded as revenues to NSG. When that same technology is sold as memory modules to data center customers, that revenue doesn't fall under NSG -- it falls under the company's Data Center Group (DCG) in that case.

So, the 20% growth figure mentioned earlier is about the company's NSG growth expectations, which means NAND-based and 3D XPoint-based solid state drives.

More than 20% growth off a reasonable base

Intel's NSG revenue was roughly $2.6 billion in 2016 -- large in absolute terms (this one segment of Intel's business is larger than many semiconductor companies' entire annual revenues), but relative to the nearly $60 billion of revenue that the company generated in total during 2016, it's small.

Intel's goal is to try to grow this business so that it, combined with the revenue that its other relatively small business units generate (like its Programmable Solutions and Internet of Things groups), can help drive significant revenue growth for the company over time.

Intel's goal is to grow this business by more than 20%, so if the company hits this guidance, this business should exit the year at a greater-than-$3 billion annual run rate. If the company can continue to grow revenue here at a steady 15-20% clip over the next, say, five years, then it should become quite a significant part of the company's overall business.

Revenue growth is nice, but what about profitability?

Though it's relatively easy to believe in a revenue growth story for Intel's NSG, investors will also want to see this business generate solid profit growth over time.

In 2016, due to increased investments in new technologies and factory capacity, NSG lost $544 million -- down from a $239 million profit in the prior year period.

At the company's investor meeting, Intel memory chief Rob Crooke said that the company's core NAND flash business will get back to profitability this year and "improve from there." However, he did say that 2017 would be an "investment year" for the company's 3D XPoint technology as it continues to spend on research and development and the manufacturing ramp of this technology.

He did clarify, though, that by the end of 2017 he expects NSG to, in aggregate, return to profitability.

If the company can achieve total NSG profitability by the end of 2017, then it's reasonable to expect that should revenues continue to grow in 2018 and beyond, operating margin could expand nicely over time.

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Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.