Why is a BoAML Analyst Bullish on Intel after Headwinds?

Intel (INTC) stock is currently trading above $55, a level that was last seen in 2000. Not only Intel but rival Advanced Micro Devices (AMD) is also trading above its 20-year high. Now, the big question is, will Intel stock cross the $60 mark or even an all-time high of $70 in the coming months? The bullish analysts place their bet on $70 whereas the median target is $60.

The Wall Street analysts have mixed recommendations, “Buy and Hold,” for both Intel and AMD. But they are increasing price targets, which they calculate by applying price ratios to their earnings estimates for the company.

The latest to join the lot is BoAML (Bank of America Merrill Lynch) (BAC) analyst Vivek Arya who has a “Buy” rating for Intel. He raised his price target to $70 from $65 and this reflects in his 2020 EPS estimate, which is 10% above the consensus estimate.

BoAML analyst: Five reasons to buy Intel

Intel is surrounded by headwinds. It lost the process node technology advantage to TSMC, lost some market share to AMD, and the CPU (central processing unit) supply shortage took a toll on its earnings growth. Moreover, the uncertainty around the US-China trade war has slowed the entire semiconductor industry’s growth. Despite this, The Fly noted that Arya is bullish on Intel for five reasons:

  • Continuous revenue growth.
  • “Right-size” operating model.
  • $20 billion stock buyback authorization.
  • Expanding in secular computing markets of 5G, AI (artificial intelligence), and cloud computing.
  • Attractive stock valuation.

Why is a BoAML Analyst Bullish on Intel after Headwinds?

First reason: Consecutive revenue growth

Vivek Arya is bullish on Intel because he believes the company will deliver annual revenue growth in 2019 and 2020. He estimates the firm to report 4% YoY (year-over-year) growth in 2020 revenue. This is above the consensus estimate of 1.8%.

Intel is the world’s largest chipmaker with $70 billion in annual revenue. It reported three consecutive years of revenue growth between 2015 and 2018 and is set to report flat to 0.5% growth in 2019. In the 2019 Investor Meeting, Intel CEO Bob Swan guided low-single-digit revenue growth to $76 billion—$78 billion by 2021. For 2019, Intel is guiding revenue of $71 billion, up 0.3% YoY. If we look at the $77 billion midpoint guidance of Bob Swan, a 4% growth in 2020 seems achievable.

Now, the question is, are the revenue drivers in place for the 4% growth? In 2018, Intel’s revenue rose 13% to an all-time high of $70.8 billion driven by 21% growth in the data center and 9% in Client Computing. These segments together make up 85% of the company’s revenue. It is these segments that are hit by a CPU supply shortage and competition from AMD in 2019.

Will the PC upgrade cycle continue in 2020?

PC shipments are growing as Microsoft is ending support for Windows 7 in January 2020, forcing all businesses to upgrade their systems to Windows 10. Both AMD and Intel are benefitting from this next big PC upgrade.

The last big PC upgrade came during the 2000 dot-com bubble when AMD and Intel stocks reached their all-time highs. However, this growth ended with a crash and the two stocks took 20 years to once again reach the 2000 level. Stock Picks System gave a detailed insight into the dot.com bubble crash.

Chances are that after January PC sales might see a big drop. This will create a PC inventory correction as was the case with graphics cards. Or the CPU supply shortage could extend the business upgrade cycle into 2020. Another potential risk is the December 15 tariff, which will bring PCs under its ambit, thereby reducing demand.

Is Intel’s data center growth sustainable?

Secondly, the competition in the data center market is heating up. AMD is gaining market share, Amazon developed its own server chips, and NVIDIA is driving the AI bandwagon. The data center market could see another demand slowdown as the US bans firms from selling technology to Chinese supercomputing companies and imposes tariffs.

At the Q3 earnings call, Bob Swan said, “We estimate in Q3 that the enterprise and government and communications service provider segment benefited from trade-related demand pull-ins of approximately $200 million in revenue from Q4.”

According to MarketWatch, the above statement made Morgan Stanley analyst Joseph Moore cautious on the sustainability of Intel’s data center revenue growth. Chinese customers are buying ahead and keeping a safety buffer to mitigate the impact of the US-China trade war. But these pull-ins could slow demand in the coming quarters as customers switch to consuming excess inventory they built up.

Despite the above headwinds, data center revenue could grow if cloud demand recovers next year. Big cloud names like Amazon and Google are investing in data center infrastructure to prepare for the connected world.

Conclusion

Intel has strong revenue growth potential in the 2020 cloud recovery. However, several headwinds like competition from AMD, CPU supply shortage, and the US-China trade war could impact the growth rate. The latter two headwinds will phase out in a year or two. The next computing wave of AI and cloud computing will drive both AMD and Intel to new highs.

Please refer to the second part of this series BoAML’s Vivek Arya: Five Reasons Why Intel is a Buy to understand the other reasons to buy Intel.