Jacob Urban

With guidance unchanged, revenue slightly lower than most expectations, and earnings in line, many may be perplexed by Intel Corporation (NASDAQ:INTC) Corp’s over 4% gain after Tuesday’s Earnings Report. After all, it seemed at times as though I was alone in suggesting that Intel was undervalued, which I did on March 15 (the stock is up over 6% since the rating) stating: “Shares of Intel Corp have fallen over 10% this past month following lower guidance and slowing PC demand, meaning its dividend yield now exceeds 3% and its earnings multiple is just 13.32. Regardless of whether or not Apple Inc (NASDAQ:AAPL) selecting Intel to be its supplier of LTE chips in 2016 follows through, Intel is an undervalued company with an attractive yield.”

Following the report my general thesis on Intel — that the company has been undervalued by the market as its PC Business is strong, its IoT unit offers growth opportunities that can offset tepid PC Demand, and the yield and buyback add to shareholder value — remains unchanged. There were, however, three main quotes from the company’s Conference Call that speak volumes on the state of the company and are worth noting in order to update and augment my original analysis.

“We expect the PC market to remain challenging, leading to a mid single-digit decline in the overall full year PC TAM. That said, we are excited about the launch of our 14-nanometer Skylake microprocessor and the capability that this product family will enable on a variety of operating systems. In particular, we are enthusiastic about the release of Windows 10 this summer, especially when combined with Skylake.” – CEO Brian Krzanich

“Data is continuing to grow, our estimates are that there’s something approximating 600 million PCs out there and that’s growing somewhat by the day that are greater than four years old.” – CEO Brian Krzanich

These two quotes are worth pairing together as they shed light to investors on the true state of the PC Market; it comes as no surprise that demand is weak, but few have heretofore considered the growth opportunities in the PC Market. While certainly many are transitioning to portable devices (phones, tablets, laptops), there are still a considerable amount of consumers who will have to replace their old PCs with another PC. Surely not all of those 600 million PCs will ever be upgraded, and surely not all who do upgrade will be to a computer that has Intel inside, but the fact remains that future demand in the market can be supported by the replacement of old PCs.

Even of PCs were in an extraordinary bull markets it would be of little service to a company that is not well-positioned to capitalize off of the demand. No matter how many people are buying PCs, Intel simply would not profit if their products lag competitors. As the aforementioned replacement scenario plays out, I am confident that Intel is very well-positioned to benefit, partially due to the above quote — Intel’s  14-nanometer Skylake microprocessor gives the company the edge it needs to compete.

“The Internet of Things Group grew 11% over the first quarter of last year, based on strength in the retail and digital security market segments.” – CEO Brian Krzanic

In my previous report on Intel I made the observation that the company’s non-PC businesses would continue to growth, “Last year, their IOT (Internet of Things) Group grew revenue by 19% to above $2 billion and the Data Center business grew operating profits by 31%. Growing revenue for the company as whole by 6% to a record $55.9 billion, Intel proves diverse enough to weather the storm of the disappointing PC market.”

The above quote from Krzanich proves this point and provides encouragement that IOT growth is continuing. Should the PC Market turnaround due to consumers replacing outdated models, the IOT growth could serve to only further ignite future earnings growth. Intel is still growing a few of its core units, and the PC Market appears far less dim than originally expected. I maintain my buy rating for dividend buyers, but unless Intel alters its mobile business I rate it a hold for everybody else.



The author owns no shares in companies mentioned above.

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