Wow. That’s the only word I can think of when I look at the chart of Intel Corporation (NASDAQ:INTC). The INTC stock price is apparently targeting the moon, as it’s been a rocket over the past week.
The INTC stock price is up 16.5% in the last five trading sessions and now more than 20% over the last month. Does Intel deserve a 30% year-to-date rally or the 40% gain since the beginning of July?
Last week, earnings per share of $1.01 came in ~25% ahead of consensus estimates. Revenue results beat expectations too, although sales grew just 2.3% year-over-year. Full-year guidance was the real driver though, as management now expects earnings of $3.25 per share on revenue of $62 billion. Analysts were looking for $3.01 per share and $61.39 billion, respectively.
The conference call was littered with positive commentary about higher-growth businesses. Reports that Intel might push out Qualcomm, Inc. (NASDAQ:QCOM) for modem components in Apple Inc. (NASDAQ:AAPL) devices only fueled the positive sentiment. And while all this is great, is the rally really warranted?
INTC Valuation
Analysts, with a new full-year consensus estimate of $62.02 billion in sales, expect revenue growth of 4.3% in 2017. Next year, estimates call for just 2.7% growth. On the earnings front, with one quarter to go, analysts expect 2017 earnings growth of 19.1%. Next year though, those estimates fall to about flat growth.
But here’s the thing. Intel trades with a forward-looking price-to-earnings (P/E) ratio of just 14.5. That’s peanuts, really. While Intel isn’t growing earnings next year, growth should resume in 2019. As a kicker, INTC stock also pays a 2.4% dividend yield, despite its massive rally over the past few months.
Trading INTC Stock Price
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After breaking out over $37, INTC stock has put the pedal to the metal. Now at $47, shares are extremely overbought (see chart above). In fact, I highlighted INTC, along with Caterpillar Inc. (NYSE:CAT), JPMorgan Chase & Co. (NYSE:JPM) and Wal-Mart Stores Inc (NYSE:WMT) as some of the most overbought stocks in the entire Dow Jones Industrial Average. In order to buy INTC, we need a pullback. Heck, we at least need INTC to consolidate.
I would look for a decline down to $44-ish. This will mark a 50% retracement from its earnings-fueled breakout. A slew of analysts came out with higher price targets post-earnings, with most targets between $45 and $50. Not to put blind faith in the analysts, but many of these targets were increased after the report. How much upside could realistically be left?
If you’re not long, wait for a pullback. If you are long, consider your risk/reward. It might make sense to sell some upside calls. I like Intel very much, but unless earnings growth picks up speed in 2018 and 2019, I wonder how much more investors will pay for INTC stock.
Earnings Implications for Intel
One reason I think INTC stock price is rallying so much is Advanced Micro Devices, Inc. (NASDAQ:AMD). After AMD’s disappointing earnings results in October and Intel’s good report, I think many investors sold the former and bought the latter. Essentially, they were plowing their money into the winner and either booking losses or taking gains in AMD (depending on when they bought the stock).
Another driver is Nvidia Corporation (NASDAQ:NVDA). Because of NVDA stock’s sky-high valuation, investors in the space are basically left with two choices if they don’t want to pay the massive premium: AMD or INTC. As I said above, investors are opting for INTC over AMD. Plus, Nvidia still has earnings on the way in mid-November.
Will the results be good? I’m sure they will. But a slight pullback in the stock would be a better setup than a rally into the results. Intel’s results were great and AMD’s weren’t that bad in my view. If anything, I would think where AMD is seeing a leveling off of demand, Nvidia is picking up that slack. We already know Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) Switch demand is strong, with management hiking its full-year forecast to 14 million units from 10 million.
So long as the chip market remains strong (and it will), NVDA and INTC should have a bid under their stocks. INTC is cheap, but with little growth next year, it’s an interesting setup. I would wait for a pullback before buying.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
