5 Reasons to Buy Intel Stock

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In most years and in most sectors, the 27% gain by Intel (NASDAQ: INTC) stock in 2019 would be considered a great year. But among semiconductor stocks and in 2019, it was a bit disappointing.

5 Reasons to Buy Intel Stock
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In fact, INTC stock price has risen 59% over the past five years, which is respectable. But the S&P 500 is up 55% as a whole in that time. And Intel semiconductor peers Advanced Micro Devices (NASDAQ: AMD) and Nvidia (NASDAQ: NVDA) are each up more than 1,000% in those five years.

Intel has struggled to meet market CPU demand for more than a year. Its 10 nanometer (nm) chips were delayed and then delayed again. Intel even wrote a public apology to its customers about the setbacks. Meanwhile, Intel was losing valuable CPU market share to AMD and others.

Now, Intel management says its 10 nm desktop CPUs will finally roll out in early 2020. There’s no question the past few years have been frustrating for Intel stock investors. But Bank of America analyst Vivek Arya says Intel may finally be poised to make up for lost ground in 2020. Arya recently named five reasons investors should be scooping up INTC stock.

1. Industry Outperformance

Sure, Intel has lost market share to AMD. But Intel grew revenue by 19% in 2018 and will likely finish 2019 flat compared to last year. That’s not necessarily AMD or Nvidia territory. But it’s better than the core semiconductor average growth rate in both years, according to Arya.

Looking ahead to 2020, Arya is projecting Intel will grow revenue by 4%.

“We think this leaves opportunity for upside revision to sales estimates/guidance – driven by still strong/undersupplied PC’s, resumption of cloud data center demand, and growth from new vectors (Mobileye) – from a new management team who has erred on the side of conservatism since taking over,” Arya says.

2. Cost-Cutting and Pricing Opportunities

Arya says Intel’s relatively new management team appears determined to better manage spending. By exiting low-value activities, being smarter with external partnerships and reducing operating expenses to 25% of revenue, Arya says Intel can help offset rising capital expenses.

Bank of America recently met with Intel CFO George Davis. Arya says Davis and his team are adamant about cost discipline. At the same time, cost cutting can shore up margins. Arya says Intel also has the chance to leverage its pricing power. In fact, even though AMD is providing fierce competition, Intel raised its average data center sale prices (ASP) by 9% in the third quarter. Its PC ASP was also up more than 3%.

3. Aggressive Capital Returns

INTC stock pays a 2.1% dividend, which is impressive in itself within the tech sector. However, it’s the company’s extremely aggressive share buyback program that has Arya’s attention. Intel has authorized a $20 billion buyback program over the next six quarters, the largest program in the company’s history. Incredibly, that buyback represents roughly 7% of Intel’s entire market cap.

Arya says the market is not fully appreciating just how huge this buyback program is. In addition to supporting earnings per share, the buybacks send an important message about management confidence.

From 2015 to 2018, Intel’s buybacks averaged around 26% of the company’s free cash flow. The current program, however, represents about 70% of FCF. Investors who read between the lines see a management team that is much more confident about the future than they were a couple of years ago.

4. AMD Threat Priced In

Arya does not deny the threat that AMD poses to Intel. But neither has the market. Arya says potential additional share losses to AMD are already priced into Intel stock at this point. Fortunately, the size of the global computing market is expanding rapidly, and Arya says there is plenty of growth opportunity out there for multiple winners.

Bank of America is projecting Intel’s unit share of the PC CPU market will drop from 84% to 83% through 2021. Arya is projecting Intel’s share of the server CPU market will drop from 95% to 90%.

Arya says Wall Street is focusing on Intel losing market share in its traditional $50 billion CPU market. However, he says investors are not appreciating the fact that Intel’s new product offerings are growing its total addressable market to more than $200 billion. In other words, Intel may be getting a slightly smaller piece of a significantly larger pie.

5. INTC Stock Is a Compelling Value

As a value investor at heart, this argument speaks to me most. INTC stock trades at a forward earnings multiple of just 12.7, more than a 30% discount to peers. In addition, Arya says Intel stock is both underweighted by U.S. fund managers and buy-rated by just 39% of analysts covering the stock.

Most analysts may not appreciate Intel’s value, but Arya does.

“Trading at a low valuation, INTC is a compelling large-cap investment levered to multiple secular advances (cloud, AI, 5G, autonomous cars, IoT),” Arya says.

Bank of America has a “buy” rating and $70 price target for INTC stock.

As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.


Article printed from InvestorPlace Media, https://investorplace.com/2019/12/5-reasons-to-buy-intel-stock/.

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