Intel's Place in a Changing AMD and NVIDIA World

Intel Corp. (NASDAQ: INTC) has seen its valuation hobbled with the move away from PCs into smartphones and tablets, and now the competitive threats from NVIDIA Corp. (NASDAQ: NVDA) and Advanced Micro Devices Inc. (NASDAQ: AMD) are proving to be significant and formidable.

It almost seems ironic to signal that smaller companies like NVIDIA and AMD are eating up Intel when you look at the actual numbers. While Intel’s $59 billion in revenue in 2016 was well over five times the revenue of NVIDIA and AMD combined, the investing world still keeps dogging Intel as the chip giant of yesteryear.

It also seems silly to think that Intel won’t be involved in the rising trends of artificial intelligence, virtual reality, autonomous cars, graphics and the Internet of Things.  Many analysts on Wall Street are just not fans of Intel. Investors in the current bull market want growth over value.

24/7 Wall St. covered Intel’s earnings in depth. The stock was up 0.6% at $34.97 ahead of earnings, and its shares were up another 1.3% at $35.42 afterward. Intel shares closed out the week at $35.31.

Jefferies maintained its Underperform rating but raised its target price to $30 from $29.

Credit Suisse maintained its Neutral rating and $35 target price, noting fair guidance but also fair valuation. The Credit Suisse synopsis said:

Despite investor sentiment to the contrary, we continue to see Intel as well positioned long term as DCG structural concerns are unlikely to materialize. In addition, the ramp of Xeon Scalable in 2H17/CY18 is likely to support more sustainable high single to low double digit growth – which should support a trading range between $34-38. Unfortunately valuation caps upside above $38 as the stock is currently trading at a 10% premium on CY18 EV/FCF to the 5yr median and a 5% premium to peers.

Merrill Lynch maintained its Neutral rating and $38 price objective, but it raised earnings estimates for 2017, 2018 and 2019. The Merrill Lynch investment rationale said:

The company has exhibited solid long term growth in data center/servers where it has 90%+ market share and which are being driven by emerging consumer cloud applications, and incremental opportunities in mobile, memory, and the internet of things. However, we see increased competitive risks from AMD/NVIDIA which could limit the historical pricing advantage Intel has held.

S&P’s CFRA maintained its Buy rating on Intel and kept its $41 target price, noting that Intel client computing, data center and cloud were offsetting enterprise declines.

Morningstar reiterated its Hold rating and $34 fair value estimate.

Some upside commentary was seen on Intel, even if not all of the ratings are that strong:

  • Goldman Sachs has a Neutral rating but a $39 target price.
  • Stifel raised Intel’s target to $41, noting upside from new offerings.
  • Wells Fargo reiterated its Outperform rating.
  •  Mizuho reiterated its Buy rating on Intel.

AMD is just getting its earnings story back on track in its turnaround and analysts just chased their targets much higher. NVIDIA remains in hypergrowth mode as well, but it is valued at more than 50 times expected earnings. Intel is valued at just 12 times expected earnings.

Intel has been making key changes to deal with the coming times of change. Intel likely will continue to dominate the PC market that everyone has written off for years, and the data center is both a huge opportunity and a risk for market share loss. One driver for Intel ahead: $15 billion for Mobileye in the world of autonomous cars. Intel also paid roughly the same amount to acquire Altera.

Intel still has much upside from its 2009 acquisition of Wind River for less than $1 billion, for embedded devices as part of its strategy to grow its processor and software presence into embedded systems and mobile handheld devices. Other key acquisitions in the past decade have included McAfee, Infineon’s Wireless Solutions and many more smaller deals.

The Intel story is one that investors are largely ignoring, even with a 3.1% dividend yield.

Intel has a 52-week trading range of $33.23 to $38.45 and a consensus analyst target price of about $39.50 going into earnings.

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