Cheap Chips Help Intel Prosper in the Cloud Despite Management Blunders

Data center growth has INTC execs making happy talk after a Q3 earnings beat

Intel (NASDAQ:INTC) is trading near five-year highs as sales to cloud data centers continue to grow. The company beat earnings estimates on Oct. 24 by a substantial margin. CEO Bob Swan predicted double-digit earnings growth for the second half of the year. Despite this, INTC stock remains cheap relative to the market.

Cheap Chips Help Intel Prosper in the Cloud Despite Management Blunders
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Intel opens for trade Oct. 30 at about $56.75, a price to earnings ratio of just 13.2. It offers a 31.5 cents per share dividend yielding 2.23%, close to the 2.26% being paid on the 30-year bond.

It’s cheap because analysts continue to doubt the rebound. Some say third quarter earnings were good only because companies were trying to beat new Trump tariffs. They say the gains were stolen from next year and refused to raise price targets.

Smiling Through

Intel management insists its fabrication problems are behind it, but there remain skeptics.

While Taiwan Semiconductor (NYSE:TSM) can make chips with circuit lines as close as 7 nanometers apart, Intel manufacturing is still on 10 and 14 nanometers.

This has given Advanced Micro Devices (NASDAQ:AMD), which is supplied by TSM, a big lead in microprocessors. It has given Nvidia (NASDAQ:NVDA), which also uses TSM products, a lead in graphics. Intel says it will have new graphics chips comparable to those of Nvidia next year.

Intel is telling reporters it now has volume 10-nm production at plants in Oregon and Israel, and that 7 nm is on track to start in 2021. It said it will start producing 10 nm chips for data centers next year. Despite this, chip supplies are expected to remain tight through the end of the year.

Intel is also leaking details of its 2020 line of Tiger Lake processors, sporting more memory and using less energy than the current Ice Lake line. That will mean faster laptops that run longer between charges.

Cloud data centers, however, don’t require the fastest processors. They need the cheapest chips, in the largest quantities, because they make up the difference in speed on volume. This has kept Intel humming along through a string of management blunders that might have killed it 20 years ago.

Cloud was the star in the third quarter print and should be the star in the fourth quarter as well. CFO George Davis predicted growth of 6%-8% in this segment, as both Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) increase capital spending.

Skeptics Abound

Despite Intel’s happy talk, some analysts remain skeptical.

Analysts who missed on Intel’s strong third quarter insist overall sales will remain weak through Christmas.

Technical analysts say the stock is now overbought and should stall out around $57 per share. Options traders are betting on a fall to $52. Some fundamental analysts question Intel’s happy talk about 10 nm. Past problems have created a credibility gap.

Most analysts see AMD continuing to gain share this Christmas, but it won’t matter if cloud demand continues its recovery in 2020. They see Intel stabilizing its share of the PC market in 2021, once it gets the 7 nm process right.

Bottom Line on Intel Stock

For traders and investors who need their money out soon, Intel stock looks overbought and should stall out here.

For those with a longer-term investment horizon, Intel is cheap relative to the market and sports a solid dividend that it covers with earnings many times over.

Intel is basically a dividend aristocrat that provides safe and rising income. That makes it an ingredient in any retiree’s portfolio, and a must-have for conservative investors.

But you don’t have to rush a decision.

Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and MSFT.


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/cheap-chips-help-intel-prosper-in-the-cloud-despite-management-blunders/.

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