Why Intel Expects a Data Center Slowdown in the Second Half of 2018

Last quarter, Intel (NASDAQ: INTC) reported a stunning result for its data center business — revenue grew 24% year over year thanks to a combination of a 16% surge in unit shipments and a 7% boost in platform average selling prices. A platform, according to Intel, consists of a processor and its related platform controller hub chip.

During the company’s most recent earnings conference call, Chief Financial Officer Robert Swan indicated that while Intel’s data center group should continue growing rapidly during the second quarter of 2018, it does expect a “deceleration for [data center group] growth from the first half [of 2018] to [the] second half [of 2018], to be sure.”

Image source: Intel.

Tougher comparisons

The first factor that Swan highlighted was that the company would have “tougher comps,” which is shorthand for “tougher comparisons.” When Intel and other companies talk about growth, they’re usually talking about growth relative to the same period in the prior year. With that in mind, it’s not hard to understand why Intel is expecting tougher comparisons for its data center group in the second half of 2018 compared to what it saw in the first half of 2018.

In the table below, I’ve included the year-over-year growth that Intel’s data center group saw in each quarter of 2017:

Quarter Q1 Q2 Q3 Q4
Growth Rate (YOY) 5.8% 8.6% 7.4% 19.6%

Source: Intel.

Notice that Intel’s data center group saw far more robust growth during the second half of 2017 than it did during the first half of 2017 (the Q4 result was particularly strong). What this means, then, is that the baseline from which Intel has to report growth is much higher in the second half of 2018 than it was in the first half of 2017.

Tougher competition

Swan also said that the company expects to face “tougher competition” during the second half of 2018 compared to the first half of 2018. Intel has largely had the data center processor market to itself for many years, so it hasn’t had to deal too much with the pressures that a more competitive environment would bring. That changes in the second half of 2018 when multiple data center processor vendors should be ramping up shipments of their new products.

That competitive pressure can impact Intel in two ways. First, to the extent that other processor makers gain share, Intel is poised to lose share. That could slow down the company’s unit shipment growth story.

Second, since it would be in Intel’s best interest to defend its current market segment share, it might get a little more aggressive on pricing than it has been in the past. If average selling prices come down as a result of a fiercer competitive environment, that’ll naturally lead to both slower revenue growth (since total revenues will be reduced) as well reductions in both gross and operating profit margins.

Investment takeaway

Beginning in the second half of 2018, things are set to get tougher for the company’s data center group business — the company’s second largest business unit by revenue and its most important growth driver. What investors will need to watch is how Intel handles this newly competitive environment and what impact this will have on the company’s data center group performance.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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