Friday was busy on Wall Street, and everyone is still talking about great results from Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL) and not-so-great results from Baidu Inc (ADR) (NASDAQ:BIDU) and Mattel, Inc. (NASDAQ:MAT). But one company not getting much press which should be in the earnings spotlight is Intel Corporation (NASDAQ:INTC). INTC stock is up more than 6% after the chip maker reported a really good beat-and-raise quarter.
The results and strong stock price reaction stand in stark contrast to fellow chip maker Advanced Micro Devices, Inc. (NASDAQ:AMD). AMD reported strong earnings earlier in the week, and yet the stock collapsed. Since those earnings, AMD stock is down nearly 20%.
In fact, INTC stock is up more than 20% year-to-date, while AMD stock is up just 3% on the year.
Last year, though, AMD surged 300% higher, while INTC stock notched a mere 5% gain.
Clearly, there is a changing of the guards here. I think that means it’s a good time to buy into the Intel growth story.
Intel Is Finally Growing Where It Matters
About a week ago, I called Intel stock the cheapest way to play the artificial intelligence revolution.
While competitors Nvidia Corporation (NASDAQ:NVDA) and AMD reaped all the rewards of the AI uptrend in 2016, Intel is now finally in the conversation. The company was already starting to illustrate growth in critical areas like hyper-scale data centers, automated driving and artificial intelligence.
Those gains continued this quarter.
Intel’s Data Center business grew 7% in the quarter, driven by 24% cloud growth. The Internet of Things (IoT) business grew 23%, driven by broad-based growth in retail, industrial, video and vehicle infotainment. The big news here is that Waymo’s newest vehicles feature Intel-based tech. Meanwhile, the memory business in on fire (37% growth), and the favorable supply-demand situation boosting revenues there looks likely to last into the foreseeable future.
Overall, the data-centric side of Intel grew by 15% in the quarter and now represents about 45% of Intel’s total revenues. The other 55% of revenues come from the PC-centric side of the business, which is stable with big profits and cash flow.
That is an attractive combination of growth and stability. About half of the business is in hyper-growth mode and exposed to secular growth markets like hyper-scale data centers, automated driving and IoT. The other half of the business isn’t going anywhere any time soon.
Valuation on INTC Remains Favorable
This attractive combination is still being underappreciated by the market.
Excluding certain one-offs, total revenues for INTC stock grew 6% this quarter. Revenue growth is projected at just over 4% for this year. Considering tailwinds in cloud and automated driving, Intel’s growth profile will likely remain similar over the next several years. Thus, it’s likely this company grows revenues in the mid-single-digit range per year over the next several years.
Meanwhile, gross margin expansion thanks to average selling price improvements and volume leverage will likely continue. So will huge spending leverage and buybacks. Overall, then, that mid-single-digit sales growth for Intel should translate into something like 10% earnings growth over the next several years.
Intel trades at 13.5 times fiscal 2017 earnings estimates. A 13.5-times multiple for 10% growth seems like growth at a reasonable price. Remember that the S&P 500 is trading at a much bigger 2017 earnings multiple (19.6 times) for similar growth potential (roughly 11%).
Bottom Line on INTC Stock
After getting its butt kicked by AMD and NVDA in 2016, INTC is back. The company is growing where it matters, stabilizing operations where it needs to, and using that combination to drive robust profit growth.
This narrative is still being undervalued by the market. As such, even after today’s pop, I remain bullish on INTC stock.
As of this writing, Luke Lango was long INTC, NVDA, GOOG, AMZN and BIDU.
