Sluggish Growth in Data Center Group Nicks Intel's Earnings

Although

In particular, data center group, or DCG, growth was lower than expected for the third consecutive quarter. Management once again blamed the lumpy nature of cloud spending, while claiming the second half of 2016 will be considerably stronger.While we agree with this sentiment, especially when considering the latest 14-nanometer-based Broadwell server CPUs is set to hit the market, the DCG segment remains a concern.

Intel’s restructuring efforts announced last quarter are on track, with half of the 12,000 workforce reduction plan completed. These job cuts are expected to result in savings of $1.4 billion in operating expenses by mid-2017 as the company transitions away from the PC toward the cloud and Internet of Things.

We maintain our $31 fair value estimate, as tepid top-line growth for 2016 is offset by the ongoing cost reduction efforts. With the shares of this wide moat-rated chip leader trading at a premium, we recommend investors wait for a wider margin of safety.

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