Intel (NASDAQ:INTC) has been on a tear since the company raised its second-quarter revenue forecast recently and projected year-over-year sales growth in its PC Client Group for the first time since 2011. INTC's guidance on the PC Client Group backs up my case from last November, when I argued that INTC was undervalued and the PC market would stabilize. It appears the PC market has stabilized, but is INTC, up 25% since November, still undervalued?
Mobile Is Still A Worry
My bullish thesis for INTC's profits going forward rested on three points: (A) PC sales would stabilize, (B) mobile was a big growth opportunity, and (C) the Data Center Group would continue to be a steady source of cash flow and growth. So far, A appears to be confirmed and nothing has happened to suggest that C is untrue. However, Intel continues to struggle with execution on the mobile front. Significant mobile design wins, once thought to come in 2014, now look more likely to come in late 2015 or early 2016 at the soonest. Encouragingly, however, INTC has clearly not given up on this large growth market and continues to spend heavily on R&D in order to break into the mobile business. In the first quarter of 2014, INTC spent 22% of revenue on R&D, up from 20% the year before. INTC has been woefully late to the game in mobile, that much is indisputable, but its continued investment in R&D makes me believe the company will eventually carve out a meaningful market share. INTC's brand, technical expertise, and significant resources should be enough to take a slice of the market from incumbents like Qualcomm (NASDAQ:QCOM). The smartphone and tablet processor market is around $20 billion and still growing rapidly, so even if INTC can only grab a minor share, its mobile segment can meaningfully contribute to the bottom line.
Even Without Mobile, Intel is in Decent Shape
Key to my bullishness on INTC is the fact that, even if mobile is a failure, the stock is priced reasonably. Its current valuation of ~$31/share gives it a price to economic book value ratio (PEBV) of 1.1. This ratio implies that INTC will never grow after tax profit (NOPAT) more than 10% from its current level. Even with the recent upside move, the market has low expectations for INTC.
Even if mobile fails to drive significant growth, INTC has the potential to go higher. If INTC can grow NOPAT by 5% compounded annually for 15 years, the stock has a fair value of ~$41/share today, a 34% upside. This expectation is reasonable considering the company has grown NOPAT at 6% compounded annually over the past 10 years.
Not a Screaming Buy Like Before
I still like INTC, but not as much as I did in November. Back then, I suggested the stock could have as much as 100% upside from its then-valuation of ~$25/share. The increase in INTC's valuation and the struggles in its mobile segment have tempered my enthusiasm, and as per above the upside for INTC is probably ~30% now.
INTC has also been downgraded from Very Attractive to Attractive by my stock rating methodology. INTC is still a good stock for a value investor, but it's not as great as it was eight months ago.
Sam McBride contributed to this report.
Disclosure: David Trainer and Sam McBride receive no compensation to write about any specific stock, sector or theme. The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.