Intel's data center business was expected to propel the chip giant to a new era of growth. But in light of the Silicon Valley company's first-quarter report, issued last week, that path to growth appears rockier than expected.
Intel reported flat revenue growth, and a full-year 2019 revenue target that fell below Wall Street's expectations.
Most striking to some analysts was the company's data center group that makes critical data center gear, including server and workstation chips and memory and data storage products. That business saw revenue fall 5% to $7.4 billion, the first decline in at least five years.
Read More: Intel CEO Bob Swan says chip giant is "taking a more cautious view of the year"
On the call with analysts last week, CEO Bob Swan stressed that Intel was "transforming from a PC-centric company to a data-centric company, and our ambitions are bigger than they've ever been." But Intel pointed to a slump in demand in the data center market, including in China; a softness that Swan says is "leading to a more cautious IT spending environment."
Notably, Swan became Intel's full-time CEO in late January, following a period where he served as interim CEO.
Downbeat data center market demand
It's a more downbeat picture compared to what Intel had been presenting to investors, Patrick Moorhead, president of Moor Insights & Strategy, said.
"The last few quarters, Intel has talked about how their recovery was going to be based on the second half the year," he told Business Insider. "The big cloud providers were going to start buying server chips again. That didn't come through."
Intel shares slipped after the company's disappointing report, and as of the closing bell on Tuesday, were still off more than 10% from last week.
"The stock performance will be dependent on how the big data centers and enterprises, whether they start buying more chips," Moorhead said.
"I do think it's going to happen. … If you see this huge growth where companies like Google, Amazon, Facebook. They have to buy more chips for more data center capability to make more money. The only question is when. The other question is China. The China economic scene hasn't been great for a year or so. There's a little bit of uncertainty right now."
In fact, Intel's data center business, which is "the heart and soul of any bull case on the stock, is now guided down year-over-year for the first time since we have ever seen," Stacy Rasgon, an analyst with Bernstein Research, said in a note to clients.
And the lowered outlook, he added, would "require a sharp second half of the year recovery especially in data-centric areas."
Some analysts aren't sure that'll happen.
Data center build-out is stalled
A key problem for Intel is the uncertainty in the broader data center market, which has appeared to weaken over the past few quarters, Wang said.
"Last year everyone was screaming about expanding data centers," he said. "These past three quarters, we've seen the cloud companies talk about slowing down data center build-out as they are waiting for capacity to catch up."
Intel remains a strong player in that space, to be sure. But Roger Kay, an analyst with the Endpoint Technologies Associates technology research firm, said the company's "position was so dominant there was nowhere to go but down."
"Qualcomm and the rest of the ARM camp is just getting started in [the data center]," Kay told Business Insider. "So, taking share isn't really an option. The buyers are either large enterprises or cloud providers, increasingly the latter. They buy at their own pace. Very hard to change the demand picture. There's always raising prices, but that seems risky in this environment and might help competitors."
Crawford Del Prete, president of analyst firm IDC, said he expects that Intel will eventually stronger data center demand over time. But "they need to continue to invest in core technology/process improvements. This base of customers will reward them as they have such huge performance needs," he said.
