Shares of chipmaker Intel Corporation (NASDAQ:INTC) were pounded Tuesday following weaker-than-expected results and gloomy guidance from Microsoft Corporation (NASDAQ:MSFT).
Intel stock fell more than 4%, an innocent bystander after MSFT delivered fiscal second-quarter earnings that showed weakness in personal computers sales and impacts of a strong U.S. dollar. Not to mention, MSFT said very little to make nervous investors at ease.
With Intel stock caught in the crossfire, investors want to know what’s next. Intel stock is now down more than 6% this year, trailing both the Dow Jones Industrial Average and the S&P 500, both of which are roughly 2%.
But it’s not time to panic.
While MSFT and Intel stock have often traded in tandem, what is hurting the former won’t necessarily hurt the latter. And this is a distinction INTC investors need to make.
First, consider INTC is no longer just a PC company. It’s true that PCs still account for well more than 50% of its revenue, but that figure is down from where 80% three years ago.
What’s more, at the at the start of 2014, INTC began to shift its focus and establish a leadership position in areas like big data and the cloud. The company acknowledged that it needed better diversification from PCs, saying it wanted to deliver low mid-teens growth in data center revenue. INTC also promised that its profits would grow faster than revenue. At the time, Intel stock investors cheered.
When Intel delivered fourth-quarter results on Jan. 16, the company delivered on those promises, and even showed that its results were ahead of expectations. Datacenter revenue surged 25% year-over-year, and the company’s net income climbed 39% year-over-year, delivering on its promise that profits would grow faster than revenue.
In other words, despite the woes MSFT may be facing, Intel stock should still do well. The company hasn’t forgotten how to execute.
INTC Continues to Lead Push Into Internet of Things
INTC has knows that the Internet-of-Things (IoT) will be its next growth area. In its most recent quarter, that segment grew revenue at 12% year-over-year, and full-year revenue exceeded $2 billion for the first time.
The Internet of Things, which refers to objects that are virtually connected on the internet, is more than just a new buzzword. And if you’ve read IDC’s recently released global market predictions for 2015, INTC made the right bet, positioning itself to dominate the IoT space in 2015 and beyond. Those trends bode quite well for Intel stock.
The IoT market will exceed $1.7 trillion in spending in 2015, jumping 14% year-over-year, says IDC. After missing out on the growth in mobile devices, INTC has targeted IoT for almost two years and has established some meaningful advantages, including its 2014 acquisition of BASIS Science, a company that specializes in wearable devices for health and wellness applications.
Nearly 15 billion devices that need connectivity will be sold this year alone, predicts IDC. And by 2020 IDC expects that number to double — hitting 30 billion devices. What give Intel stock an advantage, however, is the volume of devices that will flooded for remote monitoring. And this where Basis Science give INTC a potential leg-up on Qualcomm, Inc (NASDAQ:QCOM) and Broadcom Corporation (NASDAQ:BRCM).
Bottom Line
From my vantage point, Intel stock should trade on its own merit and for consistent execution and not be pressured based on what MSFT does or says. With Intel stock trading around $36 and a trailing P/E of 16, investors should buy on this pullback.
This is Based on INTC’s gross margin projection of 62% and its mid-single-digit revenue growth projection for 2015, Intel stock should reach $40 per share, or 15% higher from currently levels. Combine that growth with Intel stock’s 2.8% dividend yield, which has room to continue growing.
All those strengths considered, Intel stock is a compelling buying opportunity.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
