Why Intel Is Heading To $30

| About: Intel Corporation (INTC)
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Intel management appreciates Intel new realities of “adapt or die.”.

The company has begun to think differently, which means that investors must also adjust their views.

On the basis of free-cash-flow growth and the company’s continued stock buyback program, these shares should reach $30 some time in the second half of the year.

For all of the talk about how poorly Intel (NASDAQ:INTC) has performed over the past several quarters, the stock has climbed an impressive 21% over since last September.

Although the semiconductor giant does rely on the declining PC market for a significant portion of its revenue, the company's mobile advancements, albeit modest, are a step in the right direction.

I'm not suggesting that rivals ARM Holdings (NASDAQ:ARMH) and Qualcomm (NASDAQ:QCOM) should start worrying about their market position. But for investors with patience, Intel can still provide solid gains with each small step. And with first-quarter earnings due out Tuesday, management will lay the groundwork for a stock that is poised to reach $30 some time in the second half of the year.

The Street will be looking for 37 cents in earnings per share on revenue of $12.8 billion. Earnings are expected to fall almost 8%, while revenue is seen rising less than 2%. Given the deficits Intel is working to overcome, expectations have come down over the past several quarters. Essentially, no one is expecting a miracle.

The consensus estimate is down from three months ago when earnings per share was projected at 41 cents. For the full fiscal year, analysts are expecting earnings of $1.86 per share, while full-year revenue is projected to come in at $53.14 billion.

However, more important than the absolute results, investors want to see are signs that the worst is over. As it stands, over the last four quarters, revenue has fallen an average of 1% year-over-year, including a 5% year-over-year decline in the second quarter.

This means aside from beating revenue and earnings estimates, management will need to guide with more confidence that business conditions are expected to improve. Likewise, investors want signs that Intel is able to outperform peers like NVIDIA (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD), which reports earnings on Thursday, April 17. For AMD, analysts are expecting earnings of $0.00 per share.

From my vantage point, Intel still has distinct advantages over the likes of NVIDIA and Advanced Micro Devices, especially in emerging markets, which is where most of the company's growth should be in the next few quarters.

In that regard, Intel management has outlined plans to grow the chip business in the emerging markets and reinvesting cash flow back into research and development. Intel bears have not been impressed by these initiatives. But some investors are still discounting management's ability to adjust to changing trends.

This is one of the main reasons that I'm bullish on Intel's core capabilities - namely in areas like security and the cloud. The company has begun to think differently, which means that investors must also adjust their views. Likewise, Intel has begun to look for new revenue streams beyond its core competency. These include the home entertainment industry where the company has discussed the prospects of building a television.

The competition in that space is without a doubt, brutal. But management appreciates Intel's new realities of "adapt or die." So it's still premature to count Intel out. The company will eventually recapture its magic and prove that it can increase its margins and outperform expectations. What Intel needs is more time.

From an investment perspective, I believe that the stock is trading for less than its fair market value, which I have estimated to be right around $30 per share. For value investors with patience, the stock is a buy at this level ahead of earnings. And until Intel shows that it has taken a drastic step backward, the stock remains a buy and management deserves more time.

The company has excellent fundamentals - including $20 billion in cash, while paying an excellent yield. At $26, this stock is trading at just 13-times fiscal 2014 estimates, which is almost 8 points below the industry average and 1 point below Intel's historical average. On the basis of free-cash-flow growth and the company's continued stock buyback program, these shares should reach $30 some time in the second half of the year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.