So much for Spectre and Meltdown, the two security vulnerabilities found in Intel Corporation (NASDAQ:INTC) chips that were supposed to catalyze customer churn and sent INTC stock spiraling downward earlier this month.
After reporting a robust double-beat quarter with a strong full-year guide that didn’t show any signs of customer churn, Intel stock is bouncing. Big. Its up nearly 10% on the day.
And its up more than 15% since the Spectre and Meltdown concerns dragged INTC stock down to the $42 level in early January. How much higher can this stock go?
Quite a bit. INTC stock deserves to trade above $50. And there is a strong argument for it to trade above $60. Here’s a deeper look.
Strong Quarter Supports Further Upside for the Stock
Intel is a company in transition. While the company’s core PC business is stable and not going anywhere anytime soon, its also not growing. The PC market is saturated. Everyone who wants a computer already has one. There won’t be any growth there in the foreseeable future.
But Intel is managing to grow revenues at a healthy rate because the company is innovating in new growth spaces, like the data center market.
Data is exploding in popularity right now (think about all the smart devices, like smartphones, smartwatches, and smart home gadgets). All this data has to be stored somewhere. So big tech players like Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL) have created hyper-scale data centers that store and secure all that data in the cloud.
So long as data continues to explode, these data-centers will continue to grow.
And so will Intel. Intel supplies critical components to those cloud data-centers so that they actually work, making the company an indispensable part of the process.
This business for INTC is doing very well. Data center revenues jumped 21% higher in the fourth quarter, up from 15% growth the prior quarter. This led to total revenue growth acceleration from 6% to 8%. Moreover, its signals that Intel’s big cloud customers view the aforementioned security vulnerabilities as a minor hiccup in an otherwise quality offering from Intel.
Intel also delivered a strong guide, yet another sign that demand will remain robust into the near future and that investor concerns related to Spectre and Metldown were overdone.
All in all, Intel is one part stable PC business, one part surging data-center business. As it has in the past, this combination should lead to top-line growth in the 3-5% range.
INTC also has some solid margin drivers. Long-term gross margins should trend up as chip complexity and demand grows. Long-term operating margins should also trend up thanks to major cost savings initiatives from management.
Mid-single-digit revenue growth plus healthy margin drivers and buybacks should drive somewhere around 7-10% earnings growth from 2018’s $3.55 expected base (8.5% at the midpoint).
The S&P 500 is currently trading at 18.6-times 2018 earnings for roughly 10.5% earnings growth prospects after 2018 (a 77% premium).
If you carry that same premium over to INTC stock, you get to a fair earnings multiple of 15 for 8.5% growth. A 15-times multiple on 2018 earnings of $3.55 implies a price target of $53.
If growth can get to 10% after 2018, then INTC stock is looking at a fair multiple of nearly 18, which would get you to a price north of $60.
Bottom Line on INTC Stock
This rally in INTC stock will continue. This is still the lowest multiple player with exposure to secular growth markets like data centers. As the Spectre and Meltdown security vulnerabilities move into the rear-view window, investor demand for INTC stock will only grow.
And INTC stock will head higher. I think we could see INTC at $60 in the not-too-distant future.
As of this writing, Luke Lango was long INTC, AMZN and GOOG.