A lot of companies are transforming to prepare for the "new" tech marketplace. Big hitters, including IBM (NYSE: IBM), are transitioning from legacy hardware to focus on fast-growing markets including cognitive computing, big data, and cloud. Not only is IBM's transformation gaining traction, but investors have taken notice, and have driven its stock price up 8% this year.
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Though it plays in a different sandbox, Intel (NASDAQ: INTC) has a lot in common with Big Blue. Intel CEO Brian Krzanich has spent the past two plus years expanding its product lineup to focus on burgeoning markets. In Intel's case, that means cloud-data centers, the Internet of Things (IoT), and drones, among others. The difference is that investors haven't bought into what Intel is achieving, which explains its nearly 3% drop in share price this year.
The fact that investors haven't gotten aboard the Intel train is one reason why 2017 could be its best year yet. The better news is that there are several more reasons why Intel shareholders should enjoy a stellar year.
Data Center security example. Image source: Intel
According to one estimate the overall PC market declined 3.7% in the fourth quarter and 6.2% in 2016. However, thanks in part, to HP's (NYSE: HPQ) outstanding 4.3% jump in PC shipments worldwide last quarter, not to mention its whopping 8% improvement domestically, Intel's record beating fourth quarter included a 4% jump in its client computing group sales to $9.1 billion.
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lntel knows it can't rely on PCs to drive future growth. But it's worth noting that, while sales from cloud-data centers, IoT, autonomous cars, and other upstart markets will eventually overtake PC revenue as Intel transforms, its client-computing group will still continue to generate substantial sales, as it does now.
Hitting on all cylinders
Intel recorded $59.4 billion in revenue in 2016, up 7.3% compared to the prior year and a 9.8% jump, to $16.4 billion, in the fourth quarter. Even though Intel's PC unit has performed well, it's not what's driving its stellar results.
For the year, Intel's data-center division generated revenue of $17.2 billion, good for an 8% year-over-year increase. Its IoT unit, though smaller in scale, added another $2.7 billion, which was a 15% improvement. Toss in data security's 9% jump in revenue, to $2.2 billion, and it's no wonder Intel is in the midst of making its data-center and related solutions the focus of its future.
The head of the data-center team, Diane Bryant, said Intel's go-forward strategy is "data center first," confirming that, in the not-too-distant future, the division will likely overtake PCs as the primary revenue driver. Toss in IoT, "smart" drones targeting the commercial market, as well as machine learning, and the "new" Intel isn't just emerging -- it's here.
Value investors unite
No, Intel hasn't exactly lit up the investor community with excitement as IBM recently has -- which is good thing for those in search of value. At just 12 times future earnings, Intel is handily one of the best values in its sector. But Intel's relative undervaluation wouldn't mean much if it were warranted, but it isn't.
It takes time to turn a ship the size of Intel around, but it's making significant strides where it counts, which is why this may finally be the year when investors recognize what really matters, and push Intel to its best stock performance in a long while.
Not overly patient? Intel's nearly 3% dividend yield should make any necessary waiting a little easier to tolerate. Intel's not capturing the interest of investors despite delivering on its core initiatives. This is why Intel remains an absolute bargain, which also translates to relatively little downside, but no shortage of upside.
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