Skeptics continue to find fault with Intel (NASDAQ:INTC), but the company keeps delivering positive surprises – at least on the headline level.
After the bell on Wednesday, the chip giant reported its fifth consecutive quarter of record revenue, beat EPS estimates by 3 cents after items (54 cents vs. estimates of 51 cents) and raised its third-quarter revenue guidance from $13.4 billion to $14 billion. Still, the stock lost 1% in Thursday’s trading. So what’s the problem?
Critics seemed to focus on three issues – slowing developed-market demand for personal computers, rising capex spending and the company’s inability to make significant inroads into the mobile computing market. The looming issues of competition from tablets and the ability of Windows 8 to run on chips designed by Arm Holdings (NASDAQ:ARMH) also continue to hang over the stock.
All of these concerns are legitimate, of course, but three positive factors also deserve attention:
1) Intel is generating meaningful growth despite the significant headwinds of weaker PC sales and a tepid economic backdrop. This can be seen by the stock’s substantial outperformance relative to the Philadelphia Semiconductor Index (SOX) thus far in 2011, a time in which just about every other large-cap stock in the sector has been chopped up.
2) Intel is benefiting from strong sales in the emerging markets, particularly China and Brazil, and this offsets slowing PC sales in the developed world. Investors have been fixated on the overall PC sales estimates released by third-party analysts such as IDC and Gartner Group, but this data is clearly not picking up on the strength of emerging-market demand, where overall PC shipments are up 70% from a year ago.
3) The company also reported surprising results in its data center segment, where top-line results came in 15% above the same period one year ago. This indicates that the company is well-positioned to take advantage of the growth in cloud computing.
In short, it is evident that there is still plenty of good news for Intel despite the market’s reaction to the earnings release.
Does that mean it’s time to buy?
On one hand, the stock is trading at a 9.8 P/E on 2012 earnings, it has a tremendous balance sheet, and it is yielding over 3%. It’s a good bet that the stock is safe money that won’t torpedo shareholders in a benign environment for the broader market. On the other hand, Intel remains stuck in a long-term trading range, and a significant breakout to the upside seems unlikely as long as the questions about PCs’ long-term competitiveness remain unresolved.
The bottom line: obviously, don’t buy into Intel expecting major gains – especially with the stock up about 17% in the past three months. However, it is clear that Intel remains the best-of-breed in the semiconductor sector and a stock that investors can buy with confidence on any pullback.
