The Story for Intel Corporation Stock Sounds Positively Familiar


INTC - The Story for Intel Corporation Stock Sounds Positively Familiar

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Until recently, Intel Corporation (NASDAQ:INTC) seemed left out of the big-cap tech rally. The INTC stock price was basically flat between mid-2014 and mid-2017. Intel news seemed overshadowed by the constant coverage of smaller rivals like Advanced Micro Devices, Inc. (NASDAQ:AMD) and Nvidia Corporation (NASDAQ:NVDA).

The Story for INTC Stock Sounds Positively Familiar

INTC was a tech stock, but it traded more like an old blue chip, with minimal growth and volatility. Many investors were buying INTC stock more for the dividend than for capital appreciation. Suddenly, that’s changed.

The INTC stock price has gained a whopping 30% just since late August, a huge move for what looked like a stodgy old stock. It doesn’t look like the bull run here is finished, either. I liked INTC heading into Q3 earnings last month. I agree with my InvestorPlace colleague Dana Blankenhorn, who argued that a big Q3 blowout suggests more upside going forward.

INTC stock remains cheap, and Intel news looks good. More broadly, the story at Intel sounds a lot like those we’ve heard elsewhere. Those stories have played out well, and I believe the same will be true for INTC.

Intel News Looks Good

Investors couldn’t ask for much more from Intel’s Q3 report. The company raised full-year EPS guidance for the third straight quarter. Excluding antivirus software maker McAfee, whose business is in terminal decline, revenue rose 6% year-over-year. Sales in the Client Computing Group (i.e., the PC-exposed segment) were flat. But in what Intel calls “data-centric” businesses like IoT (Internet of Things) and data center, sales rose a sharp 15%.

Gross margin did weaken modestly, but operating expenses were leveraged. Non-GAAP operating income rose 8%, and non-GAAP net income rose 25%. The latter figure did benefit from a gain on a sale as Intel cut its stake in Dutch equipment maker ASML Holding NV (ADR) (NASDAQ:ASML), but Intel also had a modestly higher tax rate in the quarter.

The growth figures aren’t torrid. They certainly don’t compare to Nvidia or even AMD, but they’re progress. And there are more catalysts on the horizon. The acquisition of Mobileye closed in Q3, and Intel now can begin to ramp its strategy in autonomous driving. Intel is trying to fight off Nvidia in data center, and YTD results show some strength on that front, or at least a market large enough for two key players.

More broadly, there’s a story here that seems to be working. As James Brumley wrote last week, Intel is pivoting away from its reliance on PCs, moving into faster-growing areas like the cloud and AI. It’s a story that investors have heard before from a company Intel knows well.

Is INTC the Next Microsoft?

It’s a story that sounds a lot like that of Microsoft Corporation (NASDAQ:MSFT) just a few years ago. Microsoft had a similar reliance on PCs from its Windows and Office products. Investors valued MSFT as low as ~10x earnings per share, a multiple INTC has neared in the past. The bear case for Microsoft was that the PC business would enter an inexorable decline, and it would be beat to the punch by smaller, nimbler rivals as it tried to branch out from its legacy products.

Obviously, Microsoft has shaken those concerns. I’ve been a long-time bear on the stock, but MSFT’s blowout earnings put that bear case to rest for good. Microsoft is driving impressive growth in its cloud platform, even if it’s still second place to, Inc. (NASDAQ:AMZN). And it’s still managed to wring value out of the supposedly dead PC business by shifting customers to higher-value cloud offerings.

Intel seems to have a similar potential path on the hardware side. Intel may not be the big winner in automotive, but it can still gain sales and profits in what should be a large overall market. Nvidia unquestionably is going to take share in data center, as revenue in that category rose 175% in its fiscal Q2. But Nvidia generated $416 million in data center sales in the quarter, while Intel’s Data Center Group drove $4.9 billion in its Q3. Intel remains dominant.

And the PC business isn’t dead. A recent partnership with AMD targets high-end notebook gaming, one of the few growth categories remaining in the space. Intel was able to take pricing in Q3, offsetting volume declines, and so far it doesn’t look like AMD wants to start a price war.

Obviously, there are huge differences between Intel and Microsoft. But the path taken by Microsoft — and MSFT stock — is one that Intel stock could follow. In fact, so far this year, it looks like one that Intel is following, which is to stabilize the PC business and grow elsewhere.

It’s a path that can work. And with INTC stock still trading at barely 14x EPS, it’s a path that can create more upside, even after a big bull run.

As of this writing, Vince Martin has no positions in any securities mentioned.

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