4 Reasons Why Intel Stock Should Be Bought on Its Current Weakness

Despite Intel's ugly Q4 numbers, Intel stock remains the cheapest and least risky way to play the AI and data revolutions

Chip maker Intel (NASDAQ:INTC) reported mixed fourth-quarter results yesterday, and Intel stock dropped sharply in response to INTC’s report.

4 Reasons Why Intel Stock Should Be Bought on Its Current Weakness
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The company’s earnings beat analysts’ consensus estimate, but its revenue missed the consensus outlook. Intel’s data-centric business was weaker than expected, as the revenue growth of its Data Center Group slipped below 10%, after running at 20%-plus over the past several quarters. Moreover, the company’s Internet of Things revenues dropped year-over-year in Q4 after they grew for the first three quarters of the year. Finally, its gross margins fell meaningfully.

Worse yet, Intel provided really ugly Q1 and full-year guidance. After its revenue jumped by 13% in 2018, INTC provided 2019 revenue growth guidance of just 1%. The weakness will be led by its data-centric businesses, whose growth is expected to tumble to around 5% this year from 20% last year. Intel’s Q1 guidance, which calls for flat revenue growth and negative  growth by the data-centric businesses, is even worse. Finally, the chip maker’s  margins are expected to decline year-over-year in Q1 and in all of 2019.

Overall, Intel’s fourth quarter earnings report had a lot more bad news than good news, and that’s why Intel stock dropped more than 5% in the wake of the results.

But this decline of Intel stock is a buying opportunity. INTC stock is a long-term winner, and this is just a bump in the road.

Intel stock is dirt-cheap, and it has enormous exposure to growth sectors. The company looks well-positioned to beat expectations going forward. Headwinds are priced into Intel stock, while the sentiment towards it is dour.

In other words, Intel stock looks very well-positioned to head materially higher in 2019.

Continuous Growth Drivers Remain Strong

Perhaps the biggest negative takeaway from Intel’s Q4 report is that the company’s strongest growth driver (the datacenter market) is slowing dramatically. The company’s datacenter business had been growing at 20%-plus rates throughout all of 2018. It grew just 9% last quarter, and it’s expected to keep slowing next quarter and next  year.

But this slowdown is ephemeral. It’s the result of near-term noise from a macroeconomic slowdown, especially in China, and global-semiconductor-capacity issues, which are hitting Intel’s cloud business particularly hard.

Those issues will eventually be fixed. The global semiconductor market won’t slow down forever (the long-term trend of that market has been up, up, and away since 1995), and semiconductor-capacity issues won’t stick around forever, either.

As a result, these headwinds will inevitably fade. When they do, Intel’s continuous growth drivers will become well-recognized and push Intel stock higher.

The continuous growth drivers underlying Intel stock are all AI and data-related, and they are very, very strong.

The datacenter market will continue to grow by leaps and bounds over the next several years as more data is  collected, stored, and analyzed in the cloud by enterprises around the globe.

The IoT market is just starting to come into its own, and over the next several years, it will rapidly expand as internet connectivity is integrated into most consumer products.

AI end markets, like autonomous driving and voice assistants, are still benefiting from huge investments and will one day turn into massive businesses. Automation is just scratching the surface of its global potential. And, while the PC and smartphone markets aren’t growing by all that much, they probably won’t  shrink anytime soon.

Overall,  Intel stock still has multiple, strong, positive, long-term catalysts. Some noise is affecting Intel’s numbers right now due to factors outside of Intel’s control. Eventually, that noise will pass. When it does, continuous growth drivers will push Intel stock higher.

Intel’s Results Can Beat the Estimates

One of the best ways for a company to drive its stock higher is by delivering consecutive, beat-and-raise quarters. It looks like that is exactly where Intel is heading in 2019.

For all intents and purposes, it looks like INTC just issued conservative guidance. It projected just 1% revenue growth in 2019, versus 13% in 2018, while calling for data-centric revenue growth to slip from 20% to about 5%.

Those are massive slowdowns that likely won’t materialize. The global economy is cooling, but it’s still expected to grow by 3.5% in 2019, just 0.2 percentage points lower than 2018’s 3.7% growth rate. In a global economy that’s slowing by just 0.2 percentage points, it’s tough to see Intel’s growth rates dropping by 12 percentage points.

In other words, Intel can now easily beat analysts’ 2019 expectations. Intel’s management set the bar low due to various macroeconomic uncertainties. But those uncertainties will clear up over the next few months. Intel’s numbers will come in much better than expected, and Intel stock will rally.

The Cheapest And Most Stable Option in the Chip Space

In the semiconductor space, Intel is often mentioned alongside Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) given the overlaps among the three companies’ operating businesses and growth drivers. Yet, despite these comparisons, Intel stock is much cheaper and more stable than Nvidia stock and AMD stock.

For a chip stock with robust and broad exposure to AI and data related tailwinds, Intel stock is dirt cheap. Nvidia stock trades at over 20 times NVDA’s forward earnings. AMD stock trades at over 30 times its forward earnings. Neither of them has a meaningful dividend. That stands in stark contrast to Intel stock, which trades at 11 times its forward earnings and has an above-average, 2.4% dividend yield.

Meanwhile, Intel stock is significantly more stable and less risky than its peers, mostly due to the company’s large size, robust cash flows, and dominant market position.

Over the course of the last eight months of 2018, AMD stock went from under $10, to nearly $35, down to $16, back up to $24, down to $16 again, and back up to $20. During that same stretch, Nvidia stock went from $220, to nearly $300, down to $180, back up to $220, down to $140, up to $170, and down to $130.

Such wild gyrations are normal for AMD and Nvidia. But Intel stock never exhibits such volatility. Over the past eight months, Intel stock has bounced between $40 and $50.

Less volatility means less risk.  As a result, Intel stock is not only the cheapest play on the data and AI revolutions, but the least risky, too.

Intel Stock Can Approach $60 in 2019

Intel’s fundamentals imply that Intel stock can approach $60 in 2019.

Driven by a mix of strong data-centric growth and tepid PC-centric growth, Intel’s overall revenue growth should trend around 2%-3% over the next five years, raising its annual revenue to $80 billion by 2023.

Meanwhile, Intel’s gross margins will trend slightly higher, due to its expansion into higher-margin-end-markets, like AI and automation. Also, Intel’s operating-spending rates should drop slightly due to its consistent revenue growth. This combination of gross-margin expansion and opex leverage should drive INTC’s operating margins towards 37% by 2023, versus the 34.5% operating margin that’s expected this year.

A 37% operating margin on $80 billion of revenue makes EPS of $5.75 seem achievable by 2023. Based on Intel stock’s historically normal forward multiple of 13 and a 10% discount rate,  I arrive at a fiscal 2019 price target of more than $55.

The Bottom Line on INTC Stock

Intel stock dropped sharply after the company’s ugly fourth-quarter-earnings report spooked investors. But the spooky things about that report are all near-term in nature, and the company’s longer-term trends remain favorable. As a result, the weakness of INTC stock creates an opportunity to buy the cheapest, least risky chip stock with broad exposure to the AI and data revolutions.

As of this writing, Luke Lango was long INTC and NVDA. 

Article printed from InvestorPlace Media, https://investorplace.com/2019/01/4-reasons-intel-stock-buy-dip-simg/.

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