The share price of Intel (INTC) has started to trend higher as sell-side analysts have upgraded the stock of the company. In the last article that I published about Intel, I said the buy zone was in the $17 to $22.50 range, which is where the stock bottomed. I like Intel because of the products being ramped in the back half of 2013 and into 2014; more practically, I thought and think that the valuation is compelling.
Intel is entering the smartphone market at the end of calendar 2013 with results expected to be accretive in calendar 2014. I think Intel will be successful in the mobile market and will challenge Qualcomm's (QCOM) dominant position while Intel remains dominant in PC and server. Also, Intel has solid new product offerings in switches and silicon photonics.
I'm maintaining my revenue forecast of $50 billion to $53 billion. The stop loss level on the investment is now $21 per share with $26-$30 per share as the profit target.
I'm going to use AMD (AMD) and Qualcomm as peer company comparisons. Intel is leveraged to the PC and server markets; Qualcomm is leveraged to the mobile market, and AMD is leveraged to the PC market.
Of the three firms, AMD has the lowest gross margin. Intel's and Qualcomm's gross margins are roughly equal, but Qualcomm's gross margin is trending lower. Intel doesn't appear to have a scale advantage over Qualcomm, in terms of cost of revenue.
On a relative basis, AMD invests the largest portion of its revenue into research and development, but on an absolute basis, Intel spends the most on research and development. Recently, Intel increased its research and development spending as a portion of revenue; the expenditure is now close to the relative level of Qualcomm's expenditure. Intel should remain well positioned for the future, based on research and development expenditure.
Intel has a substantial advantage over Qualcomm in terms of capacity. Intel has roughly 10 times more capacity and is increasing infrastructure while Qualcomm's capacity has remained flat over the past few years. Qualcomm's lack of investment in infrastructure could weaken its competitive position in the coming years. The business profile is bullish for the valuations of Intel.
I'm going to use a few valuation techniques to value the common equity shares of Intel. The first model is the justified P/E ratio, which is a variation of the discounted cash flow model. The second model is the historic multiplier models. At the end is a conclusion with a recommendation based on the valuations.
Of the three companies examined in this article, Intel has the lowest cost of capital. I assume that the sustainable growth rate for this industry is 4.5%, which is derived from historic data. Using this model, Intel is fairly valued. That said, the market is saying that Qualcomm has a higher sustainable growth rate than Intel, which may or may not be accurate. The important point is that Intel is fairly valued using this model.
Now, I'm going to use the historic multiplier model valuations to value the common equity shares of Intel. Based on the model, Intel is undervalued by about 9%; the intrinsic value using this model is $25.54. Also, relative to the S&P 500, Intel is undervalued. Further, on a time series basis, Intel is coming off of being undervalued and is heading towards fairly valued. Using these models, Intel is undervalued.
With regard to the appropriateness of the valuation models, Intel has a long history of paying a dividend; thus, I think the variation of the discounted cash flow model is appropriate. Next, I don't think Intel's future growth will look that much different from its current growth, so I think the multiplier models I used are appropriate.
That said, I think Intel is undervalued and heading towards fairly valued. The previous peak at $25.54 is the intrinsic value level. It is possible that the share price could overshoot on the upside. To assess the potential of a top-side breakout, we'll take a look at the technicals.
The market for shares of Intel is bullish. I expect the market to remain bullish at least through the end of September and possibly throughout the rest of 2013 and maybe into early 2014. Intel is trading towards the $25.50 level with the potential to reach or exceed the $27 level.
Qualcomm is trading in a bull market; we'll have to see how the market reacts to the $70 level. AMD was trading in a shorter-term bear market; this may be the start of a bullish market for shares of AMD.
Near term, Qualcomm underperformed Intel, but on a quarterly basis, Intel is the relative underperformer. The risk-reward analysis favors being long shares of Intel over being long shares of Qualcomm.