Intel Corporation (NASDAQ:INTC) stock is back! The often forgot about chip-maker was left in the dust last year after competitors Nvidia Corporation (NASDAQ:NVDA) and Advanced Micro Devices, Inc.(NASDAQ:AMD) reaped all the rewards of the AI and data-center boom.
NVDA stock more than tripled in 2016, while AMD stock nearly quadrupled. INTC stock rose just 5%.
But thanks to a new line of processors, continued innovation, and expanded partnerships, Intel is finally in the AI and data-center conversation. In fact, INTC has somewhat taken AMD’s spot in that conversation.
So far in 2017, NVDA stock has continued its winning ways (up more than 100%), but AMD stock has dropped off (up just 2%) while INTC stock has come roaring back (up more than 20%).
Will this reversal continue? I think so.
At just 14x this year’s earnings, INTC stock remains the cheapest way to play the AI revolution. Moreover, the chip-maker continues to announce strategic partnerships which underscore the company’s expanding presence in secular growth markets.
In other words, INTC stock is on the right side of a huge sentiment shift and is also reasonably valued. That combination implies a lot more upside for Intel stock.
How much upside? I reasonably see INTC stock trading north of $60. That implies another 30%-plus upside. Here’s how I get there.
Intel Is Making Noise Where It Matters
Intel’s recent quarterly results underscore the thesis that the company is making serious noise in important secular growth markets.
Intel’s Data Center business grew 7% in last 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.
Strategic Partnerships Underscore That This Isn’t a One-Time Phenomenon
Of course, bears will say that Intel’s resurgence is just a head-fake. The 45% of Intel’s business in hyper-growth mode will moderate, and the whole business will be flat in the near future.
But strategic partnerships suggest otherwise.
Intel and AMD have teamed up to take on Nvidia. The new Intel/AMD chip will combine an Intel processor with an AMD graphics unit and cater towards gamers and content-creators. This move will inevitably result in market share gains for Intel at the expense of Nvidia.
Intel also recently has expanded its partnership with General Electric Company (NYSE:GE). GE Healthcare will use Intel’s Xeon Scalable Platform to enhance hospital efficiency.
This is a huge move because GE is a big player in the healthcare space, and their adoption of Intel tech illustrates that Intel’s growth may get an additional boost from the entire health-care sector over the next several years.
Perhaps most notably, rumors are swirling that Apple Inc. (NASDAQ:AAPL) is tapping Intel to power a super-fast, 5G iPhone.
It is no secret that the relationship between Apple and its modem supplier since 2011, QUALCOMM, Inc. (NASDAQ:QCOM), has come under a great deal of stress. The two tech giants are locked in massive litigation. Consequently, it makes sense that Apple is looking elsewhere for a chip supplier in future iPhones.
If Intel lands the contract, that would be a huge deal. Intel has lagged behind Qualcomm in the modem market for some time. Even at the 5G level, Qualcomm still offers a more mature and full-featured modem than Intel. But stressed relationships between QCOM and AAPL are paving the path for INTC to get back in the game.
Bottom Line on INTC Stock
Multiple strategic partnerships underscore that today’s mid-single digit revenue growth rates are here stay. Gross margin expansion due to volume leverage will also continue, as well as share repurchases.
All together, mid-single digit revenue growth plus margin expansion and buybacks should lead to roughly 10% earnings growth over the next several years.
The market currently trades at a 90% premium to its growth rate (19.7x earnings for 10.4% growth). INTC easily deserves the same premium. That implies a “fair” price-to-earnings multiple of 19. A 19x multiple on next year’s $3.24 earnings estimate implies a one-year forward price target of over $60.
I think that is where INTC stock will trend over the next 12 months.
As of this writing, Luke Lango was long INTC, NVDA, and GE.
