BoAML’s Vivek Arya: Five Reasons Why Intel is a Buy



Please refer to the first part of this series Why is a BoAML Analyst Bullish on Intel after Headwinds? to understand the other reasons to buy Intel.

Intel (INTC) is a stock loved by dividend seekers as it has a strong dividend-paying history. The year 2020 is lucrative for the tech industry as many inflection points of AI (artificial intelligence) and 5G are coming. This new tech landscape will drive all tech companies involved in it. Intel is at the core of this new landscape. BoAML (Bank of America Merrill Lynch) analyst Vivek Arya realizes this potential and therefore has a “Buy” rating for Intel. He listed down five reasons why Intel is a “Buy.”

The first reason is the consecutive revenue growth. We talked about it in length in the article Why is a BoAML Analyst Bullish on Intel after Headwinds? In this article, we will look at the other four reasons that make Vivek Arya bullish on Intel.

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Vivek Arya: Intel is right-sizing its operating model

Intel’s management changed hands in July 2018 when Bob Swan became the interim CEO and then the permanent CEO in January. He was tasked with improving operating leverage and ROI (return on investment). Originally, this fell during Brian Krzanich’s tenure from 14.27% in 2013 to 10.26% in 2017. Working on these lines, Bob Swan is restructuring Intel’s operating model. Also, he is divesting non-core low ROI businesses and buying high-value businesses.

In April, Intel exited the smartphone modem business and is reportedly in talks to sell its home connectivity division. Also, Intel sold its share of Intel Micron Flash Technology joint venture to Micron to move away from commoditized NAND (negative AND) and focus on Optane memory.

Also, at the earnings call, Intel CFO George Davis said that the company reduced its capital spending on memory. Davis added that the company channelized its spending towards accelerating 10nm (nanometer) and 7nm technology and expanding 14nm capacity. All these efforts paid off; its operating expense ratio fell from 26% in the third quarter of 2018 to 24.5% in the third quarter of 2019, its lowest in over four years.

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Intel’s $20 billion stock buyback

In the third-quarter earnings, INTC announced a $20 billion stock buyback, which it aims to complete in the next 15 months to 18 months. This is double its $10.7 billion buybacks in 2018 and higher than the $15 billion buybacks in the last 15 months. Also, the $20 billion buybacks, which equates to about 7% of its market cap, will reduce INTC’s outstanding share count and be accretive to its EPS.

Vivek Arya: INTC is expanding in 5G, AI, and cloud computing

Moving from Intel’s earnings, Arya also looked at its future growth potential. He said that Intel investors have already priced in competition from Advanced Micro Devices (AMD). But what they did not price in is Intel’s unique position to leverage growing opportunity in 5G, AI, and cloud computing.

Intel has been undergoing a multi-year transitioning from a PC-centric firm to a Data-centric firm. It is tapping a $300 billion TAM (total addressable market) spanning across various technologies. The techs include PC, data center, network, and IoT (internet of things).

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5G and IoT at the edge

Intel is at an inflection point where the exponential growth of data is driving semiconductor demand. At the Q3 earnings call, Bob Swan said, “Cloud workloads are diversifying, networks are transforming and more computing performance is moving to the edge. Today we have the product and technology leadership that uniquely positions us to capitalize on these trends.” Intel is capitalizing on these opportunities by accelerating growth, improving execution, and deploying capital in high returns area.

Intel’s execution is driving growth in networking and IoT edge businesses. Bob Swan expects revenue from these businesses to rise 12% YoY (year-over-year) to more than $5 billion this year and continue rising in the coming years. He expects to increase Intel’s market share in wireless base stations to 40% by 2022. 5G and IoT will bring opportunities in cloud-network, on-premise edge equipment, and smart connected devices.

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AI investments

Intel is also investing in AI. In 2019, Bob Swan expects AI to contribute more than $3.5 billion to its data-centric revenue, up 20% YoY. Intel’s Mobileye acquisition is proving to be fruitful. Mobileye reported record revenue, 40% YoY growth in EyeQ devices shipments, and six design wins for about 10 million lifetime units.

Intel noted that Amazon Web Services, Google, and Alibaba are adopting its second-generation Xeon Scalable processors because of the built-in AI workload accelerator.

Vivek Arya: Intel’s attractive stock valuation

The last and the final reason that made Arya bullish on Intel is its low stock valuation. A stock’s valuation compares the stock price with its fundamentals to measure its fair value as per its earnings. The stock valuation should be looked from two angles: one is from its past and one is from its peers and industry.

INTC’s PS (price-to-sales), PE (price-to-earnings), and PCF (price to cash flow) ratio is higher than AMD and Nvidia (NVDA). Unlike Intel, AMD and Nvidia are growth stocks that justify their high valuation. In Intel’s case, the PS ratio is at a five-year high whereas the PE ratio is at a five-year low.

The $20 billion stock buyback, improving operating expense ratio, revenue growth, and new computing opportunities present strong earnings potential. Arya believes that investors have not priced in these earnings drivers in the stock. This is what makes its valuation attractive.

Conclusion on INTC stock

Looking at Arya’s points, we believe that INTC stock has the potential to make a new high. Intel’s multi-year transition has positioned it well to take advantage of the next wave of AI, 5G, and cloud computing. Intel has a vast portfolio of AI accelerators, network infrastructure solutions, Optane memory, and storage solutions to tap into new opportunities. AMD and Nvidia do present competition. However, when the overall market grows, all players grow alongside.

For investors who missed out on AMD and Nvidia buys and still want exposure in the next wave of computing, Intel is a good option. This is true even though it is trading near its 20-year high of over $55.


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