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Summary

  • A more realistic view of Intel's prospects suggest that the company can still deliver long-term value.
  • Until Intel shows that it has taken a drastic step backward, the stock remains a buy and management deserves more time to execute its vision.
  • On the basis of long-term free cash flow growth and margin expansion, Intel stock should command a fair-market value of $30 by the second half of the year.

Although declining PC sales continue to threaten Intel's (NASDAQ:INTC) long-term prospects, it's a mistake to assume that the chip giant won't make the necessary adjustments to produce growth. Intel still has the resources to invest heavily in research and development for a new-generation of processors that will run on tablets and smartphones. But that's not the end-all. Nor should investors remain narrowly focused in mobile.

I won't deny the importance of this market. And I will concede that Qualcomm (NASDAQ:QCOM) and Broadcom (NASDAQ:BRCM) have established a stranglehold in mobile. Intel has the expertise to be able to catch up with its competitors on mobile chip design. Last week, the company's first-quarter results show that Intel chips are still in demand in other areas. These include servers, which run the company's Xeon chips. In fact, with the increasing shift toward cloud storage, the demand for servers is expected to be stronger than ever, which could provide a growth opportunity for Intel.

On the prospect of better-than-expected PC sales, expectations were high for Intel heading into last week's report. But contrary to what some pundits wish to believe, Intel's results weren't the disappointment they were made out to be. The chip giant reported revenues of $12.76 billion, just shy of estimates of $12.8 billion.

But more impressive than a revenue beat, management expanded gross margin to 59.75%, beating the midpoint of its forecast of 59%. Intel also reported restructuring and asset impairment charges of $137 million. This is $63 million lower than initially forecast. Likewise, the company posted $160 million from impact of equity investments and interest. This figure also beat forecasts of $25 million.

All of this culminated in earnings per share of 38 cents, which beat Street estimates by a penny. Recall, efficiency improvements have been at the core of the company's mission. The better-than-expected margin results demonstrate that management is executing according to plan. Equally important was the 11% year over year jump in the server business, which offset the 1% decline client revenue. These businesses were considered weak. But combined, they posted $4.12 billion in operating income, up 13% year over year.

And when you factor that Intel management generated roughly 70% in gross margin, it suggests that the worst is over. Intel must now figure out a way to carry this momentum into the next quarter and beyond. Management's second-quarter guidance suggests that the momentum will, in fact, continue.

Intel is calling for revenue of $13.0 billion, plus or minus $500 million. The revenue forecast is slightly ahead of the $12.96 billion analysts were looking for. Meanwhile, gross margin is expected to be around 63%, plus or minus a couple of percentage points. I was more impressed with the $18.9 billion, which Intel expects to spend on research and development, which supports my belief that management intends on remaining competitive.

At this point, no one is expecting for Intel to regain the dominance it achieved at the height of the PC boom. But a more realistic view of Intel's prospect suggest that the company can still deliver long-term value. Until Intel shows that it has taken a drastic step backward, the stock remains a buy and management deserves more time to execute its vision. On the basis of long-term free cash flow growth and margin expansion, Intel stock should command a fair-market value of $30 by the second half of the year.

Source: Intel Proves Why $30 Is The Next Target