Being a bear on Intel Corporation (NASDAQ:INTC) stock has been tough in 2018. Early in the year, Intel stock dropped big on concerns regarding certain security vulnerability issues that were discovered on Intel chips. But those issues proved to be nothing more than a blip on the radar.
Since then, Intel stock has reported strong quarterly numbers, weathered broad market volatility, and soared to above $50, a place it hasn’t been since 2000.
Unfortunately for the bears, I think this rally in Intel stock will continue. This is a cheaply valued stock with strengthening fundamentals, exposure to big growth markets, burgeoning investor sentiment, and healthy financials (lots of cash and a big dividend). That isn’t a recipe of disaster.
In fact, it is the opposite. It is a recipe for more gains ahead for Intel stock.
Here’s a deeper look.
Data Will Push Intel Stock Higher
Intel is currently undergoing what management calls its biggest transition in company history. INTC, which has historically been a company that supplies component for PCs, is now shifting away from that PC-centric business and morphing into a data-centric business.
That is a critical transition, because the PC business is all dried up. Everyone who wants a computer already has one. There really isn’t anymore growth left in that market.
But things are booming on the data side of things. The mainstream emergence of the Internet-of-Things and smart devices has created an explosion in demand for the type of stuff Intel creates.
Moreover, all those smart devices are generating data, and that data needs to be stored somewhere, so cloud data centers have become a huge thing recently. Those cloud data centers also operate on the stuff Intel creates.
Therefore, INTC’s data business is benefiting from a convergence of multiple demand tailwinds. That is why revenues on that side of the business are growing by more than 20% year-over-year. For comparison, the PC business is basically flat.
The more the data business roars higher, and the more the PC business stays flat, the more INTC’s overall business will look like the surging data business.
We are currently at a positive tipping point in that transition. Right now, the revenue split between data and PC is roughly 50/50. If current trends persist, then that split will turn into 60/40, 70/30, 80/20, so on and forth, in the not too distant future.
That means that INTC’s overall growth profile will start to look more like the data business (20%-plus growth, booming margins) than the PC business (3% growth, flattish margins) in the near future.
Granted, revenue growth in the data business will inevitably slow, but the margin drivers are the big thing here. Operating margins across the board on the data side are zooming higher. Consequently, the bigger the data business becomes, the healthier overall INTC margins will look.
That should lead to super-charged earnings growth. All in all, I continue to believe this is a 10% earnings growth story. According to YCharts, INTC stock’s price-to-forward earnings multiple has historically been roughly 50% higher than the company’s long-term earnings growth estimates.
As such, a fair forward multiple on INTC stock for 10% growth is 15.
Fiscal 2019 earnings estimates currently hover around $3.80 per share. A 15-times multiple on those $3.80 estimates implies a year-end price target of $57.
Bottom Line on Intel Stock
INTC stock is less attractive above $50 than it was when it was hovering in the low-$40 range.
But it is still attractive here. INTC is still cheap. The fundamentals are still strengthening. The financials are still strong. And the momentum is headed in the right direction.
This is definitely a name you should own.
As of this writing, Luke Lango was long INTC.