My last article regarding Intel (NASDAQ:INTC) from the floor of Intel Developer Forum 2014 September 9-11 described some of the strategies and accomplishments of Intel that take it far beyond a PC company that has a decent dividend. Intel is so much more under the leadership of Brian Krzanich - Intel CEO since May 2013.
The Intel strategy is to have Intel products inside end to end - from Data Centers to Internet of Things [IoT] devices. To do this, Intel is developing data center platforms to accelerate the use of Big Data Analytics to solve real world challenges. They have reinvented PCs to be tablets with detachable key boards with the full power of a PC (2-in-1s/detachables). These 2-in-1s/detachables are for personal and work use with wireless charging, wireless docking, 3-D facial recognition instead of passwords, and an interface that includes hand gestures, voice and facial expressions (coming in 2015). They have provided tools to product developers that will accelerate the development and sale of new products based on Intel architecture. These tools will accelerate the use of Intel products in data centers, 2-in-1s/detachables, tablets and IoT devices.
Note that this strategy includes examples of strong execution which are now beginning to show up in Intel earnings and stock price.
Intel has about 2 billion X86 devices around the world now (Intel architecture) and they estimate that this will grow to 50 billion by 2020 - a short 6 years from now.
Intel Earnings and Stock Price
The math to analyze Intel earnings and stock price got a little complicated so I developed a model to estimate different levels of earnings and stock price. If you have prepared a model of Intel earnings and stock price, please share your results and basis.
In 2009, the Intel price to earnings ratio [PE] was over 45 (price of the stock divided by the annual earnings per share). Starting in late 2009 increased Intel profits were tempered by increasing interest in mobile devices and the anticipated slowing of the PC business. Under the right circumstances, there is plenty of room for the PE to grow from the current value of 17 back up toward 45.
Year-over-year increases in earnings for data center and PC groups was over 40% from the quarter ending June 2013 to June 2014. If you ignore other parts of Intel for a moment, Intel earnings per share would be $3 per year and the stock would be at $53/share based on today's earnings and PE ratio of 17.
Krzanich stated that Intel's buy-in for tablets would taper from $1.1 billion per quarter to zero by the end of 2015. This tapering combined with continuation of the growth in data center and PC profits could result in earnings per share of $3.30 (after 30% taxes) and a share price of $56 by the end of 2015.
The earnings and stock price estimates assume continuation of the status quo and do not include the impact of the Intel strategy to be inside everything from data centers to IoT devices and to have these devices use Intel architecture - 50 billion devices on Intel architecture by 2020 - a 25 times multiplier!
Impact of New Intel Strategy on Intel Earnings and Stock Price
An increase in Intel devices from 2 billion to 50 billion by 2020 would require about a 100% increase in device sales each year for 6 years.
If sales doubled next year, then earnings could rise to over $5 per share and the stock price could rise to $87 after taxes instead of $56. More than double the current $34/share.
Another reasonable approach to more than double the stock price is to consider on a timeline the impact that Intel's strong execution may have on Intel stock price:
- 3 months: ¼ of tablet buy-in ends and Intel 14nm products on shelves before Christmas: earnings increase to an annualized $2.30 and stock rises to $41.32 with a PE of 18.
- 6 months: another ¼ of tablet buy-in ends and Intel 14nm products are implemented across data centers, PCs, 2-in-1s/detachable taking greater advantage of the smaller/cooler/lower-cost/faster chip: earnings increase to an annualized $2.47 and stock rises to $46.87 with a PE of 19.
- 1 year: Tablet buy-in ends, Intel 14nm products earning larger and larger sales and profits, Skylake architecture implemented to take greater advantage of 14nm technology, super smart phones using Intel 14nm SOC and other foundries struggling to achieve lower quality 14nm or 16nm: earnings increase to an annualized $3.18 and stock rises to $63.59 with a PE of 20.
- 2 years: Intel 10nm in production, other foundries still struggling with 14 or 16 nm technology trying to follow Intel's 14 nm, Intel devices reach 6 billion mark, resulting in an earnings increase to an annualized $4.00 and stock rises to $100 plus with a PE of 25.
Intel stock price is likely to more than double over the next two years as Intel strategies bear fruit: devices with Intel inside will more than quadruple and earnings will rise to $4 per share per year.
Disclosure: The author is long INTC.
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.