The semiconductor super-cycle is clearly underway. It resumed when prices for memory, processors, and NAND storage increased, driven by demand for a myriad of sectors. Even the PC chip giant, Intel Corporation (NASDAQ:INTC), closed near yearly highs despite a slowing desktop and laptop market. Conversely, smartphone demand is growing at a faster pace. So if the potential in the mobile market, not computers, is high, will INTC stock break-out from the $45.75 recent price and close above $50 this year?
Barclays thinks INTC stock will trade even higher than the $50s. It raised its price target by $10 and set it to $55. Intel may sell the most PC chips in the world but its business in the back-end server market is even more of a driver for growth. Mobile devices connect to the telecom network but that data it accesses is managed by powerful computers. As AI, big data consumption and complex data analytics develop, Intel will benefit.
Intel just started the Purley ramp (now called the Xeon Scalable Processors with Intel C620 Series Chipsets). Alphabet Inc.’s (NASDAQ:GOOG) Google will use this chip, as will Microsoft Corporation (NASDAQ: MSFT). This comes after Intel reported 200 design wins. Tier 2 Cloud services providers and enterprises will use these chips. Though revenue may grow in the modest single digits at around 7%, that still adds to Intel’s profits.
Growth in Memory Chips
Intel benefits from the growth in the demand for memory. It has a partnership with Micron Technology, Inc. (NASDAQ:MU) for 3D XPoint development. As demand for ever faster storage picks up, Intel’s profits will grow. INTC stock trades at a P/E of 16 times. But there is room for a multiples expansion. Samsung reported record profits and Micron raised its outlook. This suggests Intel should trade at higher multiples and would imply a share price of above $50.
In the third quarter, Intel reported operating margins of 46 percent while gross margins will be 63 percent in Q4. ASPs (average selling prices) and per unit costs are falling. Intel also expects ramping up costs for 10-nanometer manufacturing will fall. Conversely, modem and memory costs and higher marketing expenses will limit the profit margin improvements.
Threat from Advanced Micro Devices
Despite all of its new products, Advanced Micro Devices, Inc. (NASDAQ:AMD) is not as big a threat to Intel’s business in the near-term. But Intel must watch AMD closely. The competitor is selling Threadripper, a CPU that targets the HEDT (high-end desktop) market, and sells at competitive prices. While Intel adds proprietary hurdles on the Core i9, AMD is keeping the price of the Threadripper, memory and motherboard solution low. AMD’s Ryzen 3 could pressure Intel’s budget i3-series. The Ryzen 5 and 7 may force Intel to cut prices of the i5 and i7 chips, respectively.
AMD also released a mobile version of the Ryzen, but Intel will have Core i5 and Core i7 chips powering Ultrabooks, 2-in-1 devices and mobile gaming solutions. Investors should expect to see Intel continuing to dominate in both the mobile and desktop market for now. If AMD’s profits rise enough that it starts spending more on marketing, then that will put the pressure on Intel.
Takeaway on INTC Stock
Intel pulled back from yearly highs but the stock is appealing. It pays a dividend yielding around 2.4 percent. The company has little debt (long-term debt/equity is 0.39 times) so it should appeal to value investors. If INTC stock gets to $50, that would give investors a nearly 10 percent return.
A the time of this writing Chris Lau had no position in the aforementioned stocks.
