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Intel Stock: Analyzing Growth and Valuation

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Aug. 11 2019, Updated 9:19 a.m. ET

Intel (INTC) shares have returned just -0.1% year-to-date, and Intel stock has largely underperformed in the broader market. On a positive note, peer companies like NVIDIA (NVDA) and Advanced Micro Devices (AMD) have returned 15.7% and 85.0% this year. Further, the Market Vector Semiconductor ETF (SMH) is up 27.7% year-to-date.

The leading semiconductor company has been hit by the ongoing US-China trade war, a semiconductor downcycle, and a slow macro environment. Yet, analysts are now betting on semiconductor stocks as they believe the downturn is coming to an end.

Overall, the inventory levels and capital expenditure have reduced for most companies. So, is it the right time for investors to buy Intel stock? First, let’s have a look at Intel’s key trends and revenue drivers as well as other metrics.

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Second-quarter sales fell 3.0% 

Intel’s revenue in the second quarter of fiscal 2019 fell 3.0% to $16.5 billion. However, the company posted sales $0.5 billion above guidance. Intel’s data-centric sales fell 7.0% while PC-centric revenue was up 1.0% YoY (year-over-year). Comparatively, the technology company’s adjusted earnings per share rose 2.0% to $1.06 and above analyst estimates of $0.89.

A strong demand for Xeon chips as well as high average selling prices for this product drove Intel stock. However, the company is facing competition from Advanced Micro Devices (AMD) in this space. AMD recently launched the first 7nm (nanometer) CPU server Epyc “Rome.” Intel has revealed that its “Cooper Lake Xeons” will be launched in the first half of 2020 with 14nm processors. The two semiconductor giants continue to fight it out to gain market share.

5G smartphone modem discontinued

Earlier this year, Intel announced its plan to leave the 5G smartphone modem business. Apple (AAPL) bought Intel’s 5G smartphone modem business for $1 billion. However, Intel will not exit the modem business entirely. The company will continue to build 4G and 5G modems for PCs and IoT (internet of things) devices.

Intel’s press release stated, “The company will continue to meet current customer commitments for its existing 4G smartphone modem product line, but does not expect to launch 5G modem products in the smartphone space, including those originally planned for launches in 2020.” The technology company left the 5G smartphone modem business because of an unclear path to profitability and meaningful returns. The deal is expected to close before the end of 2019.

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Cash reserves boost capital

At the end of the second quarter, Intel had cash reserves of almost $12.0 billion. It generated year-to-date free cash flow of $5.7 billion. In 2019, Intel paid dividends amounting to $2.8 billion and repurchased shares worth $5.6 billion.

The company has an operating cash flow of $12.5 billion. Intel is looking to use this cash to ramp up capacity of 10nm chips and invest in the 7nm product line. Analysts expect Intel to invest $15.2 billion in capital expenditure this year.

How does Intel view Q3 2019 and 2019?

Intel estimates sales of $18 billion in the third quarter of 2019, a fall of 6.0% YoY. Unfortunately, analysts estimate the company’s operating margin to fall five percent YoY to 35.0%. Adjusted EPS might fall 11.0% to $1.24. Further, analysts expect sales of $18.01 billion and EPS of $1.24 in the third quarter.

The company estimates sales of $69.5 billion in 2019, a fall of 2.0% YoY. Likewise, analysts estimate the company’s operating margin to fall three percent YoY to 32.0%. Adjusted EPS might fall 4.0% to $4.4. Analysts expect sales of $69.4 billion and EPS of $4.39 in 2019.

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The tariff threat will impact stock

Intel expects PC supply-demand balance to normalize in the second half of 2019. But pricing pressure in NAND and volume weakness in the data center business will impact the company. Further, the looming threat of the trade war between the US and China (FXI) will impact Intel stock in the coming quarters.

Intel generates 26.6% of sales from China, which is its largest market. However, company investors should be worried because China is investing heavily in building a domestic semiconductor industry. How will this impact the US semiconductor industry as a whole?

Is Intel stock undervalued?

Intel stock has been range-bound in 2019. The stock is trading 22.0% below its one-year high of $58.83. Analysts expect the company’s earnings to fall 4.1% in 2019 and then rise 1.4% in 2020. On a positive note, earnings are expected to rise by double digits between 2020 and 2023.

Comparatively, Intel stock is trading at a forward PE multiple of 10.3x. This shows that the stock is trading at a cheap valuation, considering its long-term earnings growth and a dividend yield of 2.74%.

The forty-one analysts covering the technology company expect a twelve-month price target of $53.86. This shows that Intel stock is trading at a discount of 17.0% to average analyst estimates.

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