Why Intel Could Rise More than 20% and Outperform AMD in 2020

At the end of each year, numerous analysts and strategists from Wall Street start to pen their predictions for the year ahead. It is from these forecasts that many derived consensus targets are formed. After a year of ups and downs in the semiconductor space, and with processor shortages continuing into year-end, one firm sees Intel Corp. (NASDAQ: INTC) having close to 20% upside in 2020. Merrill Lynch’s Vivek Arya reiterated his Buy rating on Intel and raised his price objective to $70 from an already above-consensus $65.

This call now matches the street-high target price, and Refinitiv had its consensus target price at $57.72. While the note starts out as five reasons to stay positive, it also talks about industry outperformance ahead.

In the theme of that industry outperformance, Intel is predicted to post its second consecutive year-over-year sales growth despite stiff Advanced Micro Devices Inc. (NASDAQ: AMD) competition and capacity shortages. For 2020, Arya is modeling 4% annualized sales growth, which is more than twice as much as growth as the 1.7% consensus estimate.

An additional reason for the target hike was the company’s ongoing opportunity to get its operational expenses right-sized. Arya believes that Intel is more open to exiting low-value activities and that it is engaging in partnerships while lowering in-house expenses.

Another boost is that Intel has a $20 billion buyback authorization, which is about 7% of its shares. Despite being the largest buyback in the company’s history, Arya noted that not much was said about it during the most recent earnings call.

Intel is also said to be well exposed to expanding computing pie and that AMD’s “share shifts” (i.e., market share gains) are already baked into Intel’s share price. Arya sees AMD’s competitive threat as real, but the manifestation is likely to come in more measured than consensus expectations.

The last big point is that Intel has a very compelling valuation for such a high strategic asset in the United States at just 12.5 times its forward earnings. Intel also is said to be underweighted by U.S. fund managers and has a Buy or Outperform rating from only 39% of the sell-side firms that follow it.

After adjusted earnings of $4.58 per share in 2018, Arya has estimates pegged at $4.60 per share in 2019, $5.08 in 2020 and $5.24 in 2021.

The firm’s investment rationale for the Buy rating and for the stronger upside:

Trading at a low valuation, Intel is a compelling large-cap investment levered to multiple secular advances (cloud, AI, 5G, autonomous cars, IoT). Our concerns re macro, competition, and 10nm product delays persist, but we think Intel’s expanding opportunity set, incumbency, scale, and large US manufacturing are tailwinds in a volatile macro environment. Intel’s transformation to a more data-centric (B2B) company could expand margins and free cash flow.

Intel shares were last seen down 0.6% at $57.72 on Monday morning (because the Dow Jones industrials were down about 250 points and the S&P 500 was down about 30 points) in a 52-week range of $42.86 to $59.59. A $70 target implies upside of about 21.3%, and the 2.2% current dividend yield would get an implied total return call up to about 23.5%, if Merrill Lynch is correct in its call.

Merrill Lynch’s rating on AMD is Buy as well, but the $44 price objective implies upside of just 13.5% from the $38.75 current share price. AMD also offers no added investor return of paying a dividend.

Investors should always keep in mind that the market’s recovery is now close to being 11 years old, and most analysts are calling for total return predictions of 8% to 10% for Dow and S&P 500 components at this stage of the bull market. Intel shares were also up almost 24% year to date, and they were last seen up 19% from this time last year.

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