Intel (NASDAQ:INTC) reported impressive earnings again after the market close on Tuesday.
About a year ago, I wrote an article describing why I felt Intel was a buy. The article discussed the obvious fundamental values of the stock that made it an attractive buy. More importantly, the article describes why I felt that the general market view that Intel's mobile strategy (or lack thereof) was weighing too heavily on the stock. Further, Intel's dominance in the cloud/server/enterprise space would keep generating significant profits for a long time. The article concluded by suggesting it was "safe" to buy Intel under $22, start lightening up over $24, and exit around $26.
In full disclosure (i.e. bragging), I've been fortunate to accumulate a position in Intel at an average price of $20.39. In addition, the position has generated a nice income stream via dividends, and I've successfully enhanced that income stream by selling some covered calls against the position when it got near $24 in the past, and have one lot of Nov $24 covered calls in play right now.
Part of my investment process is to carefully review positions as they start to reach their one year anniversary date of purchase to see if the investment continues to make sense, consider taking tax loses while they are still short-term gains, and re-establishing exit plans. The recent earnings report was my catalyst to review my assumptions and my updated view of Intel is as follows:
Mobile - The press seems to continue to fixate on Intel's strategy for mobile. Obviously the mobile computing trend is huge. However, the prices of smartphones are falling like a rock. They are essentially display devices while most of the compute power resides in the cloud. Hence while mobile will drive a huge demand for chips, it is likely these chips will continue to generate much lower margin than chips in PCs and servers. Nevertheless, it would be nice to see Intel gain more share in this space. Intel is fast becoming the standard for Android phones. Here is a good article at Seeking Alpha that provides updates about this space.
Maybe the press will start to see mobile not as a problem for Intel, but an opportunity. During the growth of the PC market, Apple (NASDAQ:AAPL) was first to market with a great, innovative product. Yet the "Wintel" architecture became the dominate computing architecture of the next decade. If Google (NASDAQ:GOOG) and Intel can follow the same play book and make "droid-tel" the platform for the smartphone/tablet paradigm....look out. Not only will Intel's revenue and profit grow faster than anticipated, but the press will re-discover the stock and there is a lot of room for multiple expansion to drive the stock even higher.
PCs - While we in the US debate which mobile device is best to play Angry Birds on, the emerging markets continue to drive demand for basic PC computing. At some point that may slow, but Intel seems to think it will last for awhile and the results support its belief. If you trust Intel's view of this market the global PC market is far from dead.
Server/Enterprise - Intel remains the chip that powers the cloud. Further it has the economic moat of fabrication facilities, engineering talent, and R&D investment that is likely to keep it in this position for a long, long time. One example is its break through in 22nano technology, which could lead to more powerful, smaller, less energy intensive 3d chips. This breakthrough could once again push the company to the next level in the industry well before the competition.
Fundamentals - I won't spend a lot of time replaying the outstanding fundamentals of this stock. A summary of the current financial results can be found on the transcript of their conference call here. Here is one quote from that article that stands out to me :
Total cash investments ended the quarter at $15.2 billion, up $3.7 billion from the second quarter. So far this year, we have generated over $14 billion in cash from operations, paid approximately $3 billion in dividends, purchased nearly $8 billion in capital assets and repurchased $10 billion in stock.
FYI, according to Yahoo Finance the entire market cap of Arm Holdings (ARM), an often touted competitor, is just $12.5b
Technical Analysis - My view of the charts shows a strong resistance around $24 and then again at around $27.
Given those persepctive, what is a "fair price" for Intel?
According to Yahoo Finance, average earnings estimate for 2012 is $2.44. Only 4% more than 2011 estimates. I'll leave it to the army of analysts following Intel to fine tune that number and simply assume $2.40 for 2012 earnings. Playing pin the tail on the multiple and at a market multiple of 12, the stock would be at $28.80. If the market starts to believe that the "droid- tel" story answers the concern about its mobile computing strategy , it would seem the multiple could easily expand to 14 or 15, and the stock to $35.
Hence I'm going to hold on to most of my position, and hopefully let this winner run. I'll consider
- if it falls below $24 selling puts to potentially add to the position and/or generate more income.
- If it beaks through that resistance toward $26/$27, I'd consider writing some covered calls against portions of the position.
- Consider $30 a realistic "price target."