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How Intel's Cloud Business Could Lose Its Silver Lining


ENLARGE



By

Dan Gallagher

July 20, 2016 10:52 p.m. ET

Like other aging tech giants, Intel
INTC


-3.50
%




is banking its future growth on the cloud. Which is why even distant storms on the horizon can be cause for worry.

Distant because Intel faces little threat now, and because new chips aren’t developed overnight. They are typically the product of years of development and design. That is particularly true for the demanding equipment that runs today’s data centers, on which cloud computing relies. It is a segment that accounts for about 30% of Intel’s revenue now, but is its primary growth driver for the future. Intel controls about 97% of the existing market for server microprocessors, according to IDC.

But that dominance still doesn’t ensure smooth results. On Wednesday, the company reported second-quarter results that included $1.4 billion in charges for its previously announced restructuring plan. It also reported 5% revenue growth year over year for its data center business, which fell short of the 8% growth that analysts were expecting. That drove the stock down more than 3% in after-hours trading.

An Intel research and development center in Toulouse, France. Intel’s annual R&D budget of around $20 billion and its cutting-edge fabrication facilities make it a very tough competitor to displace.
ENLARGE

An Intel research and development center in Toulouse, France. Intel’s annual R&D budget of around $20 billion and its cutting-edge fabrication facilities make it a very tough competitor to displace.


Photo:

Agence France-Presse/Getty Images

Intel maintains that it can grow its data-center segment in the midteen range this year, which means it will have to pick up the pace in the second half. But longer term, Intel’s share of the market won’t remain unchallenged. Companies such as Google, Amazon and Facebook
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that build huge networks of data centers aren’t keen on depending on a single supplier. So they are examining alternatives, which happen to come from Intel’s rivals.

This is why SoftBank’s pending acquisition of ARM Holdings
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0.08
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poses a risk. The British chip designer already had its eye on the data-center market, and the deal may allow it to accelerate its plans. SoftBank says it will double ARM’s head count in the U.K., and it cited data centers as an opportunity to target.

Intel’s annual R&D budget of around $20 billion and its cutting-edge fabrication facilities make it a very tough competitor to displace. But with global smartphone growth slowing, ARM licensees such as Qualcomm
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7.43
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and Samsung,
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who compete directly with Intel, are looking at data centers as a new market for growth. Shane Rau of IDC predicts ARM-based chips will pick up about 10% of the server market by 2020.

That would still leave Intel with plenty of share. But the company needs all the data-center business it can get to offset its weakening PC side. Analysts expect data-center revenue to pass the $20 billion mark next year. That’s a big target to hit, especially with a beefed up competitor looking to bring the rain.

Write to Dan Gallagher at [email protected]

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How Intel's Cloud Business Could Lose Its Silver Lining Reviewed by on . ENLARGE By Dan Gallagher July 20, 2016 10:52 p.m. ET 0 COMMENTS Like other aging tech giants, Intel INTC -3.50 % is banking its future growth on the cloud. Whic ENLARGE By Dan Gallagher July 20, 2016 10:52 p.m. ET 0 COMMENTS Like other aging tech giants, Intel INTC -3.50 % is banking its future growth on the cloud. Whic Rating:
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