Intel Corp. May Have Made a Mistake

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Earlier this year, microprocessor giant Intel (NASDAQ: INTC) informed investors that it has fundamentally changed its product and technology development priorities.

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In the past, the company had built and deployed technologies first-and-foremost for its personal computer products, such as chip manufacturing technologies, with its other businesses adopting those technologies later down the line.

This made perfect sense considering that Intel's PC business was its largest and most profitable segment, by far.

Today, Intel's top priority is its data center business, formally known as its Data Center Group (DCG for short). This isn't Intel's largest business today, nor is it its most profitable, but it's clear that Intel thinks its data center business has a much brighter future than its personal computer chip business, known as its Client Computing Group, or CCG.

Given the trends over the last half-decade or so -- personal computers have been on the decline while data center opportunities seemingly abound -- this was a sensible enough move.

As the year has progressed, though, an interesting phenomenon has played out that has me wondering if Intel made the right move here.

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CCG is crushing DCG

For the first half of the year, Intel's CCG has handily outperformed DCG, as the table below illustrates:

1H 2017 Results

CCG

DCG

Revenue Growth YoY (%)

14.52

7.20

Operating Profit Growth YoY (%)

59.5

(10.8)

Now, to be fair, the extremely high operating profit growth in CCG, as well as the decline in CCG's operating profit, are partially due to Intel shifting some of the companywide shared cost burden away from CCG and into DCG's court.

But I think more important here is the revenue performance: In a PC market that's down, Intel has been able to wring out significant revenue growth for the first half of the year. Intel says that during the first six months of 2017, notebook platform unit shipments were up 7% while corresponding average selling prices rose 6%.

In desktops, volumes dropped 4%, but that was somewhat mitigated by a 1% rise in average selling prices.

It's also worth noting that the year-over-year growth in CCG during the first half of 2017 was augmented by shipments of cellular modems into the iPhone 7.

Longer-term, DCG probably has more growth potential than CCG does, but I think properly managed, CCG could still be a reasonable source of growth.

Indeed, with the core personal computer market stabilizing, and with new technologies emerging such as augmented reality and virtual reality that can really make use of tons of computing performance, the opportunities for Intel's CCG might be the largest they've ever been. 

Maybe DCG and CCG should be equals?

Elevating DCG was a smart thing to do given its importance to the company today and its likely increasing importance to the company in the years ahead.

I just worry that by putting DCG first rather than, say, putting DCG and CCG on equal footing, Intel may have diverted its attention and focus from CCG just when CCG began to show signs of life.

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