Intel Layoffs: How Will INTC Stock React to This?

INTC StockIntel to Cut 12,000 Jobs

Intel Corporation (NASDAQ:INTC) stock was up 1.6% intraday Wednesday, reversing an earlier loss of about three percent when Intel reported earnings after hours on Tuesday.

Intel’s first-quarter revenue and earnings beat analyst expectations, but analysts didn’t like hearing about lower revenue guidance for the coming quarter. What investors did like hearing is that the chipmaker giant reported that it’s slashing 12,000 jobs—a whopping 11% of its workforce. Laying off employees is never a good thing, but this is actually very bullish for INTC stock.

Let me explain…

Intel has struggled to grow in recent years, as demand for its personal computing chips is drying up. The PC market overall has been slowing for years now. In the fourth quarter of 2015, PC shipments declined 10.6% to 71.9 million units and for 2015, total shipments slipped below 300 million for the first time since 2008. (Source: “PC Market Finishes 2015 As Expected, Hopefully Setting the Stage for a More Stable Future,” International Data Corporation, January 12, 2016.)

According to International Data Corporation (IDC), the quarterly drop in sales is the largest decline ever, surpassing the decline of 9.8% in 2013. (Source: Ibid.)

The news gets worse, though. In the first quarter of this year, shipments fell 11.5%. (Source: “PC Shipments Fall in Latest Quarter,” The Wall Street Journal, April 12, 2016.) It looks like the death of the PC, at least in terms of growth, is upon us and that’s bad news for Intel’s PC business, which has had sluggish growth for years.

So the job cuts come as a welcome relief for the company and are a necessary step if Intel plans to survive in the post-PC era. Intel will take a one-time restructuring charge in the second quarter of about $1.2 billion as a result of the layoffs. When the layoffs are completed by mid-2017, the company expects to save about $1.4 billion annually.

Intel says the savings from the layoffs will also help the company invest in fast-growing areas in the tech industry, such as data centers and the “Internet of Things.” Intel says that it’s focused on transitioning from a PC company to one that is focused on devices that are connected to the cloud. That’s good news for INTC stockowners who need to see the tech giant return to solid growth.

Businesses have been shifting their computing power to servers, which is where Intel absolutely dominates with 99% of the market. (Source: “Watch Out, Intel: Google Is Cozying Up To Qualcomm In The Data Center,” Forbes, February 16, 2016.) With such a commanding share of the market, Intel can charge companies a premium on their chips.

Intel’s Data Center Group (DCG) business is shaping up to be the company’s major growth-driver going forward. In 2015, DCG revenue was $16.0 billion, up 11% from 2015. In 2014, DCG revenue was just $4.4 billion. (Source: “Intel’s Move Toward Servers Will Pay Off,” Barron’s, April 16, 2016.) In comparison, Intel’s largest division, Client Computing Group (CCG), which represents both its PC and mobile businesses, declined eight percent in revenue from 2014 to $32.2 billion.

The way it’s looking, the DCG business, which includes server chips, should not only help offset the decline in revenue from the PC division, but it may eventually outgrow it.

Intel also said during the earnings call that it will focus on two-in-one laptop hybrids, the sales of which are growing more than 10% a year. (Source: “Here’s why Intel’s CEO says they’re laying off 12,000 people,” Business Insider, April 20, 2016.) The company will also expand into gaming PCs, which are also growing at a similar rate, and TV set-top boxes.

Even though Intel has been slow to gain ground in the mobile market, there is potential for the company to significantly grow the business. As it stands, Intel lost $4.2 billion from its mobile operations in 2014, about $3.2 billion in 2015, and another $800 million in losses is expected this year. (Source: Barron’s, op cit.)

But if a certain rumor ends up being true, the division could get a big boost. According to Canaccord Genuity Group Inc analyst T. Michael Walkey, Intel might source 30 to 40 million “iPhone 7”s. (Source: “Intel Expected To Swipe 30-40 Million Apple iPhone 7s From Qualcomm,” Investor’s Business Daily, April 18, 2016.) That would obviously be a big win for Intel.

The Bottom Line on INTC Stock

Although Intel’s PC business is declining, the tech giant has several growth catalysts that can get it back on track. The layoffs should help with that, as the money saved will be ploughed back into fast-growing areas. Investors should be patient with INTC stock, as the company’s transition may take a couple of years before showing results.