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Why Intel Does Not Need Smartphones or Tablets

NEW YORK (TheStreet) -- Although Intel's  (INTC - Get Report) first-quarter results demonstrate that the chip giant still depends on its slowing PC business for much of its revenue, the company's stock may be a diamond in the rough, given that Intel could become a leader in the potentially high-growth area of wearable technology.

At the Consumer Electronics Show earlier this year, CEO Brian Krzanich said the company was going to focus on the Internet of Things, a new reporting segment at Intel that refers to physical objects such as thermostats and cash registers that can be connected by the Internet. Wearabe devices are part of this segment. Revenue for the segment rose 32% to $482 million in the first quarter from a year earlier.

Overall, first-quarter results, announced last week, were mixed. Revenue rose 1.5% to $12.76 billion, just shy of estimates of $12.8 billion. But gross margin was 59.8%, beating the midpoint of the company's forecast of 59%, showing that the company is becoming more efficient. While overall profit fell 4.8%, earnings per share of 38 cents beat Wall Street estimates by a penny.

Intel deserves the benefit of the doubt for that performance. Although the first wave of mobile advancements might have passed the company by, Intel doesn't necessarily have to rely on smartphones or tablets for growth.

The company could make a big splash in the wearable gadgets market, which is projected to grow to $8 billion during the next four years from $1.4 billion last year. Intel has begun to make big capital investments in the area, including its acquisition last month of Basis Science, a company that specializes in wearable-device technologies for health and wellness applications

With the deal, Intel acquired an immediate position in the next growth area of tech. Remember also that Intel has plenty of cash it can use to develop new products. 

At $27, the stock is trading at 13 times earnings estimates for next year, more than one point below Intel's historical average. Also appealing: Intel has a dividend yield of 3.4%.

Based on growth of free cash flow and the company's stock buyback program, the shares should reach $30 by the second half of the year. And if Intel becomes a leader in wearable technology, who knows where the stock will end up during next couple of years.

At the time of publication, the author did not hold a position in the stock mentioned..

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.



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