Semiconductor technology behemoth Intel (INTC:NASDAQ) has seen shares take a dive in January even after it reported a seemingly strong fourth quarter earnings report. The company managed to boost revenues year over year by 1.00%, and the company met or beat most of its guidance for the quarter. Shares still dropped by -9.00% that session alone, siding further to $29.63. The earnings report highlighted worrying trends in the two segments Intel has come to lean on heavily to offset weakening demand for its flagship PC processor chips. The company’s Internet of Things segment and its Data Center Group both reported smaller profits. Intensifying competition and a weaker global economy threaten both Intel’s market share and its bottom line. As headwinds increase, Intel will see its strong position gradually eroded.

Business Cools

In spite of reporting increasing revenues, Intel’s fourth quarter earnings report was at best mixed. Revenues growth for the quarter did not translate to profit, after operating income fell by -2.70% year over year while margins contracted by -1.10% to 64.30%. The final annual figures were also middling, with revenue for the year down by -1.00% to $55.40 billion and net income shrinking to $11.40 billion.

Soft revenues were expected for client computing. Demand for personal computers has been in a 4-year rut, and shipments have continued to dwindle, falling to 75.7 million PCs shipped in 2015, an -8.30% contraction compared to 2014, nearing lows last seen nearly a decade ago. Client computing—which includes PC chips—continued its slide with $8.76 billion in revenues, a -1.00% decline. Intel has invested heavily in shifting away from its traditional business, expanding its efforts into IoT processors, and data center technologies.

While both have continued to grow revenues and generate profits, the fourth quarter saw concerning results. The modest 5.00% growth in data center technology revenues represented a dramatic deceleration from 20.00% expansion in the fourth quarter of 2014. Profits fell by -4.30% for the segment versus the prior year as result. IoT had a similar outcome in the quarter, expanding revenues by 6.00% yet posting an underwhelming $132 million in profit.

Raising Flags

The two segments’ tapering performance raises a major flag for Intel after pivoting towards IoT and DGC as its solution to offset the fading PC segment. Intel has been effective in in transition with DCG already accounting for 60.00% of the company’s profit not to mention Xeon processors still being by far the most widely used for data centers. However, growth has slowed recently, and competition is increasing in key markets.

Mobile chip-maker Qualcomm in particular has targeted several of Intel’s high-value targets, vying to take some of Intel’s most important business. In China, the company recently entered a joint venture with the Government to produce server chips based on ARM architecture in a bid for market share which will weigh one of Intel’s crucial revenue sources. China has been limiting its exposure to American technology amidst growing espionage fears.

Qualcomm has also potentially snagged one of Intel’s biggest end-users with search-engine behemoth Google. Alphabet is predicted to publicly announce a shift in processor providers if Qualcomm’s new technology can prove it is capable of the workload. The move would represent a loss of 300,000 server processors quarterly. While these losses will not unseat Intel short-term, they do represent the first time the company will face a serious challenger in the data center processor sector. To stay relevant, Intel recently introduced a fiber-optic network system to improve data center connectivity. While representing an interesting revenue channel, it faces a stiff challenge from Mellanox, a company with an established and successful fiber-optic solution.

Intel’s IoT division has also seen an increasingly hostile market. While the segment led the company in growth in the fourth quarter, generating $2.30 billion in revenue, the 6.00% mark was well of 2014’s impressive 19.00%. Intel has seen strong challenges from Qualcomm and also from Taiwanese chip-maker MediaTek which targets low-to-mid range products.

Increasing competition points towards commoditization within the sector, which would further damage Intel’s strategy. Intel predicts there will be 200 billion connected devices by the year 2020, but it is becoming increasingly unclear just how many processors they will provide. For the year, the unit’s operating income dropped by -12.00%, accounting for a paltry 4.00% of Intel’s total profits.

Fundamentally Speaking

Since the beginning of 2016, Intel shares have given a weak performance, losing -16.34% year to date especially on the back of the recent earnings report. Even though revenues have managed to continue growing, it has not enough to offset falling income from key divisions. Moreover, the company is pulling back on investment as evidenced by falling capital expenditures, potentially limiting future growth potential. A strong balance sheet boasting ample cash will be enough for Intel to maintain its dividend, currently yielding 3.61%, helping to drive demand from income investors looking to exploit Intel’s blue chip status. However, there may be more attractive entry points for long-only traders interested in establishing Call positions.

Even though shares are more fairly valued than a year ago with a price-to-earnings ratio of 12.32, prices might not yet have reached the point at which value investors are willing to jump in. As evidenced by the company’s faltering growth in processor sales, Intel no longer resembles a high growth technology company, justifying its substantially lower valuation. Even though fourth quarter earnings managed to beat expectations, the weaker guidance will weigh on shares over the near-term, with Put positions wisely initiated on any uptick targeting 52-week lows at $24.87. Once the rout in global equities reverses, income and value investors would be wise to establish longer-term Call positions betting on a rebound in shares.

Not so Great

The year ahead looks to be another difficult period for Intel. Despite still dominating the Data Center market, Intel is beginning to show cracks in the armor, with competitors increasingly taking market share. Qualcomm represents a serious threat, even if only as more leverage for clients to negotiate with Intel. Any loss of business in China could represent a major blow to the bottom line. IoT must also prove that it can convert revenues to income, which it has so far been unable to do. While new offerings will definitely improve results, Intel still faces an uphill battle in successfully offsetting its mounting PC losses. Over the next two quarters, Put positions are suggested as shares experience further downside with the second half of the year possibly presenting solid entry points for Call positions designed to take advantage of any rebound.