Is Intel's Momentum Sustainable?

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 |  About: Intel Corporation (INTC)
by: Dana Blankenhorn

Summary

Intel is up almost 30% this year, 10% in the last month.

Most of the gains are based on unproven speculation concerning PC sales.

If the July 15 earnings are poor, buy the dip.

Suddenly Intel (NASDAQ:INTC) is on fire.

The stock is up 29% this year, and over 10% in the last month, mainly on speculation that the stagnant PC business is coming back.

Some of the hype comes from the company itself, in the form of a recent 8-K. Some of it comes from research at the Gartner Group, which expects PC shipments to rise 8% next year after a flat 2014.

Some of it comes from Intel itself, which promised to fix the battery drain problems that currently tie users to wall plugs at CompuTex early this month. The latest reference design from the company, introduced by President Renee James, is for a thin hybrid tablet-with-keyboard similar to the Microsoft (NASDAQ:MSFT) Surface, and major Taiwanese OEMs promised to produce them.

In short, the move in Intel is based on speculation, the idea that things will soon get better.

Intel reports its earnings on July 15 and analysts are expecting big things, a median estimate of 52 cents per share of earnings, compared to the 38 cents per share reported for the first quarter. Yet Gartner isn't expecting growth until next year, and Intel's big problems - its failure to make it big in tablets and phones - remain.

Over the last few years, Intel has become a yield stock. You buy it for the dividend, currently 22 cents/share. It costs a little less than $1 billion in earnings per quarter to service that dividend, and even in the weak first quarter this year the company made nearly twice that. But the latest speculation has dropped the yield on Intel common below 3% - before its most recent move it was 3.14%.

So there is an obvious play here for income investors. Watch the earnings, and if they disappoint, if the price of the shares fall, then pounce on a better yield.

Intel's hope for growth lies in two areas - graphics and the Internet of Things. Its new Skylake chip has had shares of rival Nvidia (NASDAQ:NVDA) on the run the last month - down nearly 3%, while Intel, alias Chipzilla, is up 10%. But again, that's hype, that's media speculation. The good press on the new chip has to be followed up by big orders or it's just talk.

The other hope for growth lies in the Internet of Things, which Intel has been hyping. Putting chips into industrial devices, consumer devices, and wearables, tied to clouds or simple apps, would seem to dramatically increase chip demand. Intel has created a consortium, the Open Interconnect Consortium, with Samsung in order to push its conceptual framework. But that group is going up against another, open source initiative, called the AllSeen Alliance, which already has software.

What this tells me is that we are still at the stage of seeking OEMs, marketing companies and software outfits who can turn frameworks into working products and get them into the market. Any bonanza is still a year or two off, and Intel has now divided those loyalties by creating a rival group. A Tower of Babel could kill the Internet of Things in its crib.

The bottom line is that the move in Intel is speculative. A lot of small investors love Intel - both here at Seeking Alpha, and at other sites I've written for, like the Motley Fool and TheStreet.Com. They will pound the table in comments for the company, convinced that "this time, for sure" the predictions of growth are about to become real.

But if you're looking for Intel to become a growth stock again, you're making a bet that has been a loser for almost 15 years now. Best to play for yield.

Disclosure: 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 (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.