An Intel Short Squeeze?

Dec.12.13 | About: Intel Corporation (INTC)

Every time NASDAQ updates its short interest data, I eagerly look forward to Bill Maurer's excellent short-interest updates. In this series of articles, Bill always provides great commentary about the short interest changes in a number of names that, frankly, everybody cares about. One of the names that he covers is Intel (NASDAQ:INTC) - the most highly shorted (by sheer number of shares) name in the Dow Jones (see his recent article here: Intel Short Interest Declines But Remains Elevated).

In the article, Bill points out that Intel's short interest has declined by a smidge over the two-week interval between short interest updates, but still remains a whopping 4.78% of the float. Now, the folks shorting Intel aren't stupid - they're preying on the fact that PC sales continue to decline and that traction in mobile remains elusive. Further, given that Intel expects next year to come in roughly flat relative to 2013, it would seem that the risk in shorting Intel isn't all that much.

Or is it?

Intel Set The Bar Low, But If It Beats...

Quite frankly, when Intel announced that 2014 would be flat (revenue and profit), I expected the shares to go a fair bit lower and braced for impact (well, this is figurative - I didn't actually do anything). However, the market seems to be OK with that guidance. Indeed, just today, Romit Shah from Nomura Securities, a well-known Intel bear with a perpetual $20 price target on the stock, upgraded the stock to neutral and upped his price target to $24. This isn't a glowing endorsement, but it shows that the analysts with "sell" ratings on the stock are now starting to feel skittish about being outright negative on the stock.

See, if Intel blows away estimates during 2014, then the guys that are bullish look like heroes and the folks with "neutral" ratings can quietly go "bullish" without looking too silly. But if you're, say, somebody with a $16 price target and a "sell" rating because you think Intel's already pretty realistic estimates (PC sales down 5-7%, DCG up 13-15%, Other IA flat) are going to prove too high, then you will look incredibly silly if these estimates end up having been low-balled. And, of course, a hero if you're right - but the risk/reward just isn't that good for that.

If Intel is able to - gasp! - beat its projections in 2014, then I expect that rather massive short interest (in raw share count, anyway) will start to cover as the bulls begin to cheer the good news. I wouldn't quite characterize it as full-on short-squeeze if it were to happen (unless Intel comes in with guns blazing and posts record revenues and profits), but I do think that short covering would add material fuel to the proverbial fire.

...But Will It Beat?

I haven't the faintest idea simply because I don't quite have a read on new management. The Q3 results weren't exactly "gang-buster" (GM beat, revenues were in-line with guidance) and the Q4 guide wasn't super, so I don't think Intel will low-ball on a "one quarter out" basis. I do think, though, given the embarrassment that management has had with its full-year projections (guided down multiple times in 2012, guided down again for 2013), there will be some conservatism there.

I think, though, that the ramp of Bay Trail-M/D for low cost PCs could surprise even further (particularly in emerging markets where I believe PC sales have been weak as a result of cheap tablets). I also think that the gross margin hit from the "contra-revenue" associated with Bay Trail may not be as bad as expected, particularly if Intel is successful in pushing its Merrifield/Moorefield parts into Android tablets (which I believe will be the major volume drivers).

Final Thoughts

With that being said, I would not recommend investing with the hopes that Intel beats in 2014 to any meaningful degree. Invest, if you choose to do so, for what is likely to be an incredibly strong product lineup beginning in 2015 with "Broxton" for "hero" smartphones/tablets as well as momentum in the cellular modem space. Also, while the debate rages on, don't buy Intel if you think that PCs are in permanent secular decline - this is still the vast majority of the company's business. I personally think PCs will eventually bottom out on the unit front and I think Intel will basically cut costs via both design optimizations and process technology, but this is certainly not an opinion that everybody shares and, frankly, my guess is as good as anybody's.

So, would I expect an Intel short squeeze in 2014? Probably not, although a beat-and-raise quarter would go a long way to having Intel meaningfully outperform the market next year. The January 17 earnings release and subsequent call could be very interesting indeed.

Disclosure: I am long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.