Intel (NASDAQ:INTC) is set to report earnings on Thursday. It should be a most fascinating earnings report. That’s because Intel stock has been stuck in the middle of many cross-currents in recent weeks.
Last year, Intel stock hit $60, reaching its highest level in nearly two decades. It sharply fell back last winter. But it rebounded this spring and again reached $60. It appeared Intel stock was finally ready to top its all-time high of $75 from back in 2000. But it hasn’t happened yet. Instead, a terrible earnings report and more trade war worries caused investors to dump their Intel shares.
After Intel fell a quick 25%, however, it stabilized and is starting to move back up again. It’s at a pivotal point heading into earnings. A good report could easily spike the stock above $60 in the coming months. But another weak quarter would mark a negative trend and kill all of Intel’s momentum.
Intel and the Trade War
Intel got absolutely lit up on its last earnings report, falling as much as 13% the day after. That’s nearly unprecedented for the firm. It’s not hard to see why. The company guided down its revenue outlook for the year from $71.5 billion to $69 billion. If that’s the final figure, it will represent a year-over-year decline for the firm.
Shortly thereafter, Intel updated its three-year outlook with similarly disappointing guidance. It sees revenues growing at only a low single-digit rate, as fast data center growth is offset by its no growth PC business.
On the latest conference call, management spent a great deal of time talking about cutting costs and focusing on core products. That makes sense since the current business environment isn’t rewarding growth projects.
With it unclear how long the U.S.-China trade dispute will continue, it’s difficult for semiconductor companies to make any solid plans for the future. Other big firms, like Texas Instruments (NASDAQ:TXN) have recently announced major delays in new capital spending for similar reasons.
The world’s consumer electronics market risks a significant slowdown if global trade flows remain diminished. And that’s a major problem for Intel’s prospects in many of its product lines.
A Potential Huawei Silver Lining
While the trade war is a major drag on Intel’s prospects for the rest of 2019, there is a positive. Huawei in particular remains in the doghouse. The Trump administration made a truce with China over electronic components, but there’s no guarantee that it will be extended. Firms are nervous to buy Huawei products for now.
This gives Intel and Qualcomm (NASDAQ:QCOM) a big opportunity in 5G. Huawei was supposed to be the leading global supplier of 5G equipment. But big countries like the United Kingdom are now reconsidering whether they should buy goods from Huawei at all.
This is particularly good timing, as far as Intel is concerned. Europe just made a ruling on the rollout for connected cars, favoring a 5G solution over a wifi-based one. This should ensure that EU countries roll out 5G quickly and buy routing gear from Intel, which has focused on 5G automotive equipment.
Intel Remains A Cheap Stock
Tech stocks have been flying lately. And for a while, INTC stock was going with them. But since the latest correction, Intel’s stock price is far below where you’d expect from looking at its peers.
At this point, Intel is trading at just 11.5x trailing earnings. Despite the flattish revenue picture, analysts expect earnings to rise slightly over the coming 12 months, putting the forward P/E ratio closer to 11x. And if and when the trade war ends, analysts will raise their EPS targets for Intel going forward.
Assuming no imminent resolution to the trade war drama, Intel should earn something like $4.50 going forward. A 10x P/E ratio on that gets you a $45 stock price. That limits the downside nicely. A 12x P/E ratio – hardly aggressive – gets you to the low $50s. 15x earnings, which would be a nice expansion for Intel but not expensive compared to peers, would get Intel stock up to $67.
Intel Stock Verdict
Ultimately, Intel will finally break out of this two-decade consolidation period. That’s right; Intel stock will break to new all-time highs above $75 per share over the next couple of years. The market is totally ignoring the company’s great strides in automotive and other growth areas.
Instead, it is simply valuing Intel as a boring commodity computer chip maker that is on a relative downswing against archrival AMD (NASDAQ:AMD) for the time being.
Throw in the tariff troubles, and traders have made Intel stock one of the cheapest big tech companies out there. This situation won’t last forever. Intel is a buy and could shoot up on earnings this week with the slightest hint of improving business conditions going forward.
At the time of this writing, Ian Bezek owned INTC, QCOM, and TXN stock. You can reach him on Twitter at @irbezek.