Can Intel Crack This $200 Billion Nut?

Markets Motley Fool

Shares of Intel (NASDAQ: INTC) have lagged the market so far this year, as the chipmaker struggles with low PC sales and stiff competition in the central processing unit business from the likes of AMD. But the company's latest results clearly indicate that its pursuit of fast-growing opportunities is bearing fruit.

Continue Reading Below

Intel beat expectations in the recently reported second quarter, posting 9% year-over-year revenue growth thanks to a massive jump in revenue from the non-volatile memory (NVM) segment. In fact, the chipmaker saw revenue gains across four of its five segments last quarter, including the Internet of Things (IoT) division and the data center business.

These segments could substantially boost Intel's growth in the long run, given the massive end-market revenue opportunity available. The company's internal analysis reveals that non-volatile memory and autonomous vehicles (included in IoT) together represent a $200 billion revenue opportunity, but is it doing what's necessary to make a dent in these areas? Let's find out.

Intel's striking big in NVM

Intel's NVM revenue jumped an impressive 58% year over year during the second quarter to $874 million. This segment accounts for just 6% of the company's revenue at present, but Intel believes it has great potential from a long-term perspective, as non-volatile memory could hit a size of $100 billion by 2021.

More importantly, Intel has been riding with the right partner to make its presence felt in this space -- Micron Technology (NASDAQ: MU). The two companies have been working together for a long time, with Micron acting as Intel's flash foundry partner. Micron's expertise in memory chips has been a boon for Intel, enabling the latter to develop its 3D XPoint technology that's expected to be more efficient when compared to traditional NAND and DRAM memory.

Continue Reading Below

Intel is now selling its 3D XPoint-based memory products under the Optane brand and has already landed a big cloud customer in the form of IBM. This clearly indicates that the chip giant is going to target cloud service providers to sell its NVM products, believing that it can plug the gap in data-center storage arising from the inefficiencies related to DRAM and NAND-based storage.

Intel's internal benchmarks already indicate that Optane performs faster than its conventional storage devices for the data center. So it won't be surprising if the company lands more cloud customers in the future.

However, the chip giant isn't going to get a free run in this market. Partner Micron has already launched a standalone product based on the 3D XPoint technology, known as QuantX. Just like Intel, Micron will also be targeting data-center applications with this product, with sales expected to begin in the second half of 2017 and hitting critical mass in 2019.

Intel can expect stronger competition from memory industry giants such as Samsung, which is ready to ramp up 3D non-volatile storage from a new generation fabrication line that was completed earlier this year. Therefore, Intel investors will need to keep a closer eye on the competition and the potential impact that it might have on its non-volatile memory sales over the next few months.

The automotive opportunity

The other $100 billion revenue opportunity Intel is targeting is in autonomous cars. The chipmaker forecasts that autonomous cars will be a strong revenue channel by 2030, and Intel wants to maximize the potential by providing end-to-end self-driving-car solutions at a low cost.

The company has started working toward its goal of reducing the time to market for automakers by acquiring Mobileye, with the acquisition set to be completed in the current quarter. In addition, Chipzilla has sewn together an alliance that includes BMW and Delphi Automotive in a bid to accelerate its self-driving platform development.

The good news for Intel investors is that the alliance has already made some headway into autonomous cars. Delphi, for instance, helped an Audi SUV negotiate dense traffic in Silicon Valley back in May using Intel's self-driving-car platform. Intel now wants to go further, so its automotive alliance will start testing 40 cars by the end of the year.

In addition, Intel's other acquisitions, such as that of Nervana Systems, Movidius, and Altera should fill in the other pieces of the self-driving jigsaw puzzle as they focus on different areas such as deep learning and vision-based sensors.

However, investors shouldn't forget that Intel will run into NVIDIA in this space. The graphics specialist is currently working on its next-generation self-driving platform and plans to deliver Level 4 autonomous technology (which needs human intervention only in some circumstances) by next year. What's more, Tesla is already using NVIDIA's self-driving technology across its model lineup, indicating that Intel is currently behind the curve in this space.

The Foolish takeaway

There's no doubt that Intel is trying to attack the right areas to accelerate its long-term growth, and it's also finding some success as evidenced by the growth of its non-volatile memory business. But Intel will need to stay ahead of the curve in these fields if it is to keep up its solid growth momentum. Otherwise, the competition could knock the wind out of its sails.

10 stocks we like better than Intel
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Intel wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 1, 2017

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nvidia and Tesla. The Motley Fool recommends BMW and Intel. The Motley Fool has a disclosure policy.