New Strategy Positions Intel Stock For Strong Long Term Gains

  • Intel is transforming from a PC company to a company that powers the cloud and billions of smart, connected computing devices.
  • The company announced a restructuring initiative that will permit important cost savings through rationalizations and a new strategy.
  • Intel CEO Brian Krzanich outlined the new strategy for Intel focused on the data center, the IoT, and specialized high-performance hardware.

Intel (NSDQ:INTC) recently announced a restructuring initiative to accelerate its evolution from a PC company to one that powers the cloud and billions of smart, connected computing devices.

One aspect of the restructuring plan - the elimination of up to 12,000 jobs globally, 11 % of the workforce - has made news headlines and has been interpreted by many analysts as a sign that the leading chip maker is in troubled waters.

However, another interpretation is that Intel simply doesn't need the positions that it's eliminating, and plans to save costs through site consolidations worldwide, a combination of voluntary and involuntary departures, and a re-evaluation of programs. The company estimates that the restructuring will deliver $750 million in savings this year and annual savings of $1.4 billion by mid-2017.

Intel will intensify its focus in high-growth areas where it is positioned for long-term leadership, with the data center and Internet of Things (IoT) businesses as the main target growth areas, enabled by specialized hardware such as memory and field programmable gate arrays (FPGAs).

The Intel announcement notes that these growth businesses delivered $2.2 billion in revenue last year, and made up 40 percent of revenue and the majority of operating profit, which largely offset the decline in the PC market segment.

On April 26 Intel published a note written by CEO Brian Krzanich to clarify the reasons for the restructuring initiative and outlining a new strategy for Intel. "Our strategy itself is about transforming Intel from a PC company to a company that powers the cloud and billions of smart, connected computing devices," says Krzanich.

The Wall Street Journal notes that Intel's business model so far had been centered on providing hardware for a PC market that kept expanding, just like Microsoft (NSDQ:MSFT) has been providing software for the same market. But today other vendors offer cheaper hardware and software, perhaps not as good as Intel and Microsoft products, but fit for purpose. In particular, computer chips based on designs licensed from ARM are more cost-effective than Intel products for many PC makers.

Moreover, the PC market isn't expanding anymore. On the contrary, PC sales have been mainly declining since Apple (NSDQ:AAPL) introduced the first iPad in 2010. Therefore, according to The Wall Street Journal's analysis, Intel is forced to focus on growth areas such as computers for data centers and IoT smart devices with onboard data processing and communications capabilities.

The new strategy outlined by Krzanich is based on five core points:

  • The cloud is the most important trend shaping the future of the smart, connected world - and thus Intel’s future.
  • The many "things" that make up the PC Client business and the Internet of Things are made much more valuable by their connection to the cloud.
  • Memory and programmable solutions such as FPGAs will deliver entirely new classes of products for the data center and the Internet of Things.
  • 5G will become the key technology for access to the cloud and as we move toward an always-connected world.
  • Moore’s Law will continue to progress and Intel will continue to lead in delivering its true economic impact.

In 2015, Intel acquired Altera, a manufacturer of re-configurable complex digital circuits such as FPGAs - intermediate steps between software and hardware, combining the flexibility of software and the higher performance of hardware. The acquisition was intended to combine Intel's leading-edge products and manufacturing process with Altera's leading re-configurable hardware technology, and expected to enable new classes of products in the data center and IoT market segments.

In February, Intel announced initiatives to develop faster, smarter and more efficient 5G wireless networks. 5G - 5th generation mobile networks or 5th generation wireless systems - is the next phase of mobile telecommunications standards, expected to advance wireless bandwidth much beyond the current 4G standard and enable billions of increasingly smart and connected IoT devices, data-rich personalized services, and advanced cloud applications.

Intel will continue to invest resources in its efforts to stay on top of Moore’s Law - the doubling of the number of transistors per unit area in integrated electronic circuits every two years. The current generation of Intel high performance chips, based on 14-nanometer transistors, delivers industry-leading performance, power, density, and cost per transistor, but the company is planning for the future

"As we progress from 14 nanometer technology to 10 nanometer and plan for 7 nanometer and 5 nanometer and even beyond, our plans are proof that Moore’s Law is alive and well," said Krzanich. "Intel's industry leadership of Moore's Law remains intact, and you will see continued investment in capacity and R&D to ensure so."

Other initiatives, such as Intel's strategic investments in quantum computing, promise to keep the company on Moore's Law in the next decade and beyond. Quantum computing technology, which according to Intel is one of the more promising areas of long-term research, is starting to receive significant government funding, as shown by the new $1.13 billion program announced by the European Commission, and promises to revolutionize computing in the long term.

"Putting it all together, Intel is uniquely positioned to power the cloud and drive the increasingly smart, connected world," concluded Krzanich. "It is an incredibly exciting time for Intel as we accelerate our strategy and our impact. The work we do at Intel today will change this company, our industry and the world." Based on the company's past performance and current strengths, investors should consider taking advantage of the recent dip in the Intel stock, buy the stock, and hold it.

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