Shares in Intel Corporation (NASDAQ:INTC) have stabilized after a month-long downturn and have settled at a pretty reasonable price for a blue-chip dividend payer. Intel stock reached levels not seen since the turn of the century in mid-October and it has struggled ever since.
Indeed, INTC stock is off more than 6% since its last peak.
Note that you can’t blame the surprising results of the general election for this underperformance. Intel stock slumped well before voters went to the polls and shrugged off the outcome.
Rather, the selloff looks like profit taking after Intel stock reached such lofty levels. But you can bet it will get up there again. In addition to offering a compelling valuation, INTC is making big bets in a number of growth areas.
Robotics, self-driving cars, virtual reality and the Internet of Things are just some of the endeavors Intel is plowing resources into.
Perhaps most exciting is the company’s breakthrough in its core chip business. In a development that one analysts says “could be one of the most important of our generation,” INTC may have found a way to overcome limitations in silicon chip performance.
Susquehanna Financial Group analyst Christopher Rolland describes it this way:
“Early this year, Intel released Silicon Photonics (SiPh) transceivers used to optically connect servers and network equipment. While this announcement was important, it is NOT the type of silicon photonics technology we will be discussing. Early this year, Intel released Silicon Photonics (SiPh) transceivers used to optically connect servers and network equipment. While this announcement was important, it is NOT the type of silicon photonics technology we will be discussing. We understand that Intel has ‘proof of concept’ silicon, is looking to improve today’s low yields, and that a commercialized product could be ready in as little as three to five years. This technology is nothing short of miraculous and we view it as a potential game changer for Intel and the semiconductor industry.”
Intel Stock’s Affordable Valuation
If these areas of investment pan out — especially the new chip technology — Intel stock is clearly underpriced. But even absent those growth drivers, INTC stock isn’t particularly pricey. Intel trades at about 12 times forward earnings on a five-year compound annual growth forecast of 10%. That’s cheap by the standards of today’s bull market.
Consider that Intel is a market laggard in terms of its price-to-earnings to growth ratio, which shows how fast a stock is rising relative to the company’s profit potential. Intel stock’s PEG of 1.3 offers a 22% discount to the S&P 500, according to Thomson Reuters Stock Reports. Additionally, it represent a 13% discount relative to its five-year average.
At the same time, the Intel dividend yield is on the cusp of 3%, which is fairly attractive in these days of low interest rates. Its blue-chip status and 20-year history of not missing a payout adds to its credibility.
INTC stock still struggles with the headwind of PC sales. They’re a slowly melting iceberg. But this is old news. What investors should be focusing on is Intel’s success in the segment that makes server chips for cloud-based computing and all its other promising areas of growth.
The Data Center Group already contributes about 50% of operating earnings and the business is riding a secular, not cyclical, trend. Servers have a very bright future with the expansion of cloud computing.
The bottom line is that Intel stock looks like a solid, long-term equity income play. Between the steady dividend, a compelling valuation and potential for better-than-expected earnings growth, shares should deliver market-beating total returns.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
