For a stock only a couple of weeks removed from a 17-year high, Intel Corporation (NASDAQ:INTC) has had some bad news this year. INTC stock has plunged twice already in 2018 — first when long-running chip flaws were disclosed and then off the loss of a key customer. Despite those moves, however, Intel stock still is up, about 9% so far this year.
That comes on the back of 27%+ gains in 2017, all of which came in the fourth quarter of the year. All told, a stock that looked like dead money seven months ago has gained more than 40% since.
But at this point, I think it’s time to take profits. INTC stock remains reasonably cheap, and the company still is grinding out growth. The chip space has taken a modest hit of late, but still is on a multi-year bull run led by high flyers like Nvidia Corporation (NASDAQ:NVDA) and Micron Technology, Inc. (NASDAQ:MU). With Intel much less reliant on the PC business, I can see the case for Intel stock, particularly after a recent pullback to $51.
Still, it’s a relatively thin case — and there are a number of risks here. Intel still has a reasonably large exposure to the PC. Competition is coming. Nvidia is targeting Intel’s lucrative data center business, and Advanced Micro Devices, Inc. (NASDAQ:AMD) is for the first time in years a real competitor in CPUs. The big run in Intel stock over the last few months seems to have priced in much of the potential upside — and not all of the risk.
Two Big Plunges for INTC Stock
For the most part, Intel stock has shrugged off its two big downside moves. At the start of the year, INTC dropped about 9% in just eight days after the Meltdown and Spectre chip flaws were disclosed. I argued not long after that the two issues raised long-term risk for Intel stock. But the market instead focused on a strong fourth-quarter earnings report, and sent INTC stock higher.
Intel stock then fell again earlier this month, after Apple Inc. (NASDAQ:AAPL) announced it would displace Intel from the Mac by designing its own chips. Whether this move was related to the flaw disclosures is unclear. Apple has brought chip development in-house before, notably sending shares of British chipmaker Imagination Technologies plunging last year when it decided to design its own GPUs for the iPhone.
INTC stock fell 6% on the news, though once again it has bounced back. On this site, Tom Taulli argued last week that the sell-off was an overreaction. The iMac, after all, has relatively small market share, and as Taulli pointed out, Apple as a whole accounts for just 5% of Intel revenue. And while Intel might be losing the iMac, it may also be gaining the iPhone. Speculation continues that Apple will ditch Qualcomm, Inc. (NASDAQ:QCOM) in favor of Intel modems.
Intel stock, then, has mostly shrugged off the headline risks so far in 2018. But those are far from the only risks facing INTC stock.
The PC Problem for INTC Stock
Intel does look reasonably cheap, at 13x 2019 earnings-per-share estimates. But I still question whether Intel can grow enough even to support that modest multiple — chip flaws and Apple aside.
“PC-centric” revenue, as defined by Intel in its 10-K, still accounts for 54% of total sales. Perhaps surprisingly, Intel has ground out some growth in that category of late. PC-centric sales rose 3.3% in 2017 after a 2.2% increase the year before. The rest of the business — what Intel calls “data-centric” unsurprisingly is performing much better. That revenue jumped 8.7% last year on top of a 14.7% rise in 2016.
The PC industry has held up reasonably well — but it still saw a 2.8% decline in shipments in 2017, according to Gartner. And with AMD’s Ryzen line potentially taking market share, more than half of Intel’s revenue seems likely to start declining at some point soon.
That alone isn’t a deal-breaker for INTC stock — particularly at the current price. Grinding out mid- to high-single-digit growth in data and even low-single-digit declines in CPUs still suggests overall revenue growth. A modest amount of margin expansion suggests Intel still can drive earnings growth — and probably more than justifies a 13x multiple. Something like 15x $4+ in 2020 EPS gets INTC stock to $60-$65 over the next two years. That’s 10%+ annual returns, when including the 2.3% dividend yield.
But that scenario also shows the risk. The PC space is in decline. Nvidia is posting huge growth in data center. AMD’s EPYC got a big win with the Microsoft Corporation (NASDAQ:MSFT) Azure platform. If the PC space turns further south, and Intel’s data-centric growth further decelerates, there’s a real risk of Intel earnings turning negative. And that portends a potential share price back below $50, if not further south.
With INTC below $40, as it was for much of 2017, the risk/reward still looked reasonably positive in that scenario. Back above $50, that’s no longer the case. INTC can grind out some growth, and some shareholder returns. But the easy money has been made.
As of this writing, Vince Martin has no positions in any securities mentioned.