Intel is not a name that investors typically associate with the phrase "growth company." In fact, over the last several years, it has been a challenge to try to keep its revenues flat, let alone grow.
Indeed, Intel saw its revenues contract in 2012 and 2013, before seeing a return to growth in 2014. Intel had hoped to extend this momentum into 2015 and had originally projected growth for the year, but ultimately the company is on track to see its revenues decline by a modest 1% for the year.
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This revenue contraction was driven by both a weaker-than-expected PC market as well as unanticipated weakness in the enterprise server portion of the company's Data Center Group, or DCG.
That said, management seems confident that, going forward, Intel can once again be a "growth business" over the long term. Let's take a closer look at why management thinks so.
The overarching strategyIntel's strategy is actually pretty simple. Since the company's DCG is now quite large and relatively fast growing, and since the company has a set of small, fast-growing businesses that add up to a fairly substantial amount of revenue (Internet of Things, Non-Volatile Memory, and Software and Services Groups), the growth in these businesses can more than offset fairly significant declines in the company's Client Computing Group.
Stacy Smith's "Napkin Math"To illustrate this point, CFO Stacy Smith showed the following slide with some "napkin math," as you can see below:
Image source: Intel.
The idea here is simple: if investors assume that Intel can grow DCG at a mid-teens rate consistently from here on out (the current forecast is for this to be the case through 2019) and if they assume that the other set of businesses keep growing as they have, then Intel can still grow, albeit at a modest low-single-digit rate even if PCs decline by 10%.
In fact, what's even more interesting is that in cases where the PC market is down by 5% and flat, respectively, Intel can still -- under the set of assumptions outlined above -- deliver anywhere from mid-single-digit to high-single-digit growth.
Although there are obviously risks to these assumptions (say, PCs decline by more than 10% in a year or DCG comes in below expectations), it's clear that Intel's business is far more resilient than it has been in the past, something that I think investors will appreciate (perhaps leading to a higher price-to-earnings multiple for the shares over time).
Intel forecasting growth for 2016For 2016, Intel is forecasting a return to revenue growth. The company says that it's expecting revenue growth in the mid single digits. If we take a closer look at the various components of the forecast, we see that Intel is looking for the following:
- Client Computing Group (includes PCs as well as tablets/phones) revenue that's flat to up at a low-single-digit rate (though Intel is looking for PCs to be slightly down)
- Data Center Group revenue that's up at a mid-teens rate
That said, Intel pointed out that 2016 has 53 work weeks, rather than the typical 52, which has a positive impact on the year-over-year comparison relative to 2015.
As an Intel stockholder, I hope that the company can continue to deliver growth in the coming years. As long as it can consistently deliver even just modest growth, the share price should continue to move up, rewarding long-term shareholders.
The article Understanding Intel Corp.'s Growth Strategy originally appeared on Fool.com.
Ashraf Eassa owns shares of Intel. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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