Traders were exhilarated last Friday as an 8% surge in Intel (NASDAQ:INTC) stock almost single-handedly drove the Nasdaq 100 Technology Sector index to strong gains for the day. I’m not a huge fan of buying stocks at higher prices, but the momentum in the INTC stock price was undeniable.
Still, there were questions buzzing in my head, which I’m sure are shared by other onlookers: Is the Intel stock rally justified? And, is it sustainable?
It takes a bit of digging to uncover the facts — and to decide whether traders ought to jump in the trade, or just stay away.
Understanding the INTC Stock Move
In case you didn’t get the memo, the trade war’s been tough on the semiconductor industry; indeed, it’s been a headwind for American companies generally as they’ve had to bear the brunt of higher costs of goods, which were then unfortunately passed down to consumers.
While INTC stock is up 8.1% in the last three months, the iShares PHLX Semiconductor ETF (NASDAQ:SOXX) increased 4.8% and the First Trust NASDAQ-100-Technology Sector Index Fund (NASDAQ:QTEC) gained less than 1% in the same period.
A working paper authored by the Federal Reserve Bank of New York’s Mary Amiti, Columbia University’s David Weinstein, and Princeton University’s Stephen J. Redding, confirmed this with findings that “the U.S. tariffs were almost completely passed through into U.S. domestic prices, so that the entire incidence of the tariffs fell on domestic consumers and importers up to now” and that “U.S. producers responded to reduced import competition by raising their prices.”
The analyst community seems to have responded by trimming earnings and revenue expectations considerably; this, in my view, at least partially accounts for why nearly 80% of companies beat earnings projections in the third quarter of 2019. I would place Intel in this basket, as the third-quarter earnings surprise strikes me as more of a relief rally than a reliable barometer of the company’s health.
This, I believe, also explains why the analyst community only expected Intel to post Q3 earnings of $1.23 per share and revenue totaling $18.05 billion. Given that, a “beat” shouldn’t have been too surprising; in any case, the actual numbers were $1.42 per share for the earnings and $19.19 billion for the revenue.
Is the ‘Beat’ Legit?
As you might expect, Intel CEO Bob Swan seized the opportunity to bask in the glow of the apparent outperformance. He was particularly effusive about the company’s artificial-intelligence (AI) segment:
“We are driving meaningful AI revenue inside Intel, now with products spanning from the data center to the edge; we expect to generate more than $3.5 billion in AI-driven data-centric revenue in 2019, up more than 20% year-over-year.”
The problem now is that Intel will have to live up to that expectation if it’s going to sustain the INTC stock price rally. Remember, expectations are a double-edged sword: crank them up too high, and the company could disappoint its shareholders.
It could also disappoint analysts, who are largely responsible for setting these expectations in the first place. I have to credit Morgan Stanley analyst Joseph Moore, though, for keeping his expectations in check as he advised caution in a market environment that shows “Intel is wrestling with intensifying shortages of its own microprocessors, where customers have clear incentives to build in front of December tariffs on the client side, and where customers in some geographies have incentive to build a safety buffer in the event of trade-dispute impact.”
Cool Your Jets on Intel Stock
My greatest concern about INTC stock is that it’s now trading at a higher price based on an earnings beat that might not be as impressive as Intel’s CEO would have us believe. It’s perfectly okay for retail investors to watch and wait, keep studying, and gather more intel on Intel before making any investing decisions.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
