October 14, 2015 / 7:27 PM / 4 years ago

Intel's data center business seen rebounding in 2016

Oct 14 (Reuters) - Intel Corp’s move to cut growth forecast for its highly profitable business that makes chips used in data centers may have disappointed investors, but analysts see the unit rebounding next year as more users take to cloud services.

Expanding the business is critical to Intel’s efforts to reducing its dependence on the PC market, which has been shrinking for almost four years. Buying Altera Corp earlier this year was a step in this direction.

Intel said on Tuesday it expected the data center unit to grow in “low double digits” on a percentage basis in 2015, compared with its earlier forecast of about 15 percent, as businesses cut spending.

Worldwide IT spending on data center systems is expected to fall 3.8 percent in $142 billion this year, research firm Gartner said in June, citing a strong dollar.

“Perhaps the revelation of low double-digit was a little worse than people had expected, but this is a long-term phenomenon for them whereby this group has finally gained critical mass,” FBR Capital Markets analyst Christopher Rolland told Reuters.

The data center group comprised about 29 percent of the company’s total revenue in the third quarter ended Sept. 26. Analysts expect the business to account for about 40 percent of the total by 2017.

Rolland said investors should not over-react to what was just a trimming of the growth outlook for the business.

Analysts said Intel’s data center business was strong enough to withstand the concerns of weakness in the broader economy.

Deutsche Bank Markets Research analysts noted that while the data center group has slowed due to enterprise weakness, it is still growing at double-digits on a percentage basis.

Some analysts, however, said the forecast cut could be indicative of weak growth going ahead into 2016.

“Data center expectations were stepped down meaningfully exiting the year, and we believe the trajectory in 2016 carries meaningful risk,” Bernstein analyst Stacy Rasgon wrote in a note.

Some expect growth to remain in the low double-digit range.

“(DCG) is still a very good business, but we think growth will be more in the 10-12 percent range, leaving overall corporate revenue growth in the low single digits,” Morgan Stanley analysts wrote in a note.

Up to Tuesday’s close of $32.04, Intel’s stock had fallen 11.7 percent this year, compared with a 9.4 percent fall in the broader semiconductor index. (Reporting By Lehar Maan and Abhirup Roy in Bengaluru; Editing by Saumyadeb Chakrabarty)

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