Brean Capital, Credit Suisse and Barron’s are just a few of the research firms to have given bullish outlooks on Intel Corporation (INTC) stock in recent weeks that include upside north of 20%.
While many of the arguments in favor of INTC make sense, fact is, there are far better places to put money in big tech without having such high exposure to the sector’s worst performing industry — PCs.
What to Like With Intel stock
Brean Capital insists that year-over-year comps moving forward will show a favorable trend for Intel, while Brean, Credit Suisse, and Barron’s are all calling for continued strength and growing reliance on its server business over Client Computing (PCs).
Perhaps most importantly for retail investors is the valuation multiples for Intel stock that most bullish analysts keep referring to. Barron’s notes that INTC trades at just 13.7x trailing-12-month earnings versus a multiple of 24 on the S&P 500.
Based on this metric — along with suggestions of further strength in its server business and future improvements in PCs — it seems that any reasonable investor would conclude that Intel stock is a good opportunity, right?
The Answer Is Not So Simple
Intel stock is the classic “can’t get any worse” investment opportunity. However, analysts and economists have been calling for a bottom in PC shipments for the last two years. Yet, here we are in 2016, and shipments declined a whopping 10% year-over-year during the first quarter to hit its lowest total since 2007.
Furthermore, the 13.1 million shipments in the U.S. is the lowest in three years.
This weak performance in PCs coupled with equally woeful performance from hard disk drives has given sufficient warning to investors that INTC earnings is going to be really bad.
With that said, there is no reason whatsoever to believe that the already bad won’t get even worse. Neither PCs nor HDDs have shown any light at the end of the tunnel. Therefore, the notion that Intel’s struggling business has now bottomed is without proof.
Lastly, it is equally irresponsible and misleading to look solely at Intel stock’s P/E ratio and conclude that it is cheap. First off, Intel’s EPS expectations for this current year have declined from $2.41 to now $2.36 over the last 30 days, and that’s despite expectations that Intel will soon cut thousands of jobs.
If those job cuts don’t come, or if the market continues to worsen, Intel’s EPS for FY2016 could be far worse than $2.36. This means that Intel’s price-to-FY2016 earnings ratio might be much higher than 13.7.
However, for the sake of argument, let’s assume that Intel is really trading at less than 14x FY2016 earnings. Even then, Intel is still more expensive than Apple Inc. (AAPL) at 12x FY2016 EPS, or International Business Machines Corp. (IBM) at 10.7x forward earnings. Fact is that big tech trades at a big discount to the S&P 500, so you can’t really look at Intel stock’s multiple and conclude that it is cheap.
The Bottom Line for INTC
There are no legitimate reasons to own Intel stock, even if it jumps higher after reporting earnings. Investors are much better off with AAPL, IBM or even Qualcomm, Inc. (QCOM), which investors can own for 10.8 times its forward P/E.
Moreover, QCOM has far more exposure to mobile chip technology, unlike Intel, which is mostly PC and laptops.
In other words, the bulls are wrong, don’t buy Intel stock.
As of this writing, Brian Nichols owns shares of AAPL stock.
