Intel's (NASDAQ:INTC) stock has risen sharply since reporting fourth quarter results and may be about to increase to even higher prices in the weeks ahead. The equity is currently trading at a cheap PE ratio when compared to some of its semiconductor peers in the VanEck Semiconductor ETF (SMH). This means the stock could see some significant multiple expansion ahead of it.
Additionally, analysts have been boosting earnings and revenue forecasts for the company, which suggests that analysts see the company returning to growth, a better outlook than previously believed.
Another positive sign is that it appears options traders are making bullish bets that the stock rises over the next few months. I noted similar trading patterns taking place among options traders in Intel before the company reported better than expected earnings results in my mMrketplace service Reading The Markets starting on Jan. 10. This activity started when the shares were trading around $59. Since that time the shares have surged by almost 15%.
Currently, the stock may be too cheap given a better than expected business outlook. Shares are now trading for around 13.5 times 2021 earnings estimates of $5.03 per share. While earnings estimates for 2021 reflect little growth, consensus estimates suggest a growth rate of about 10% in 2022, with earnings rising to around $5.52 per share.
That is well below the average PE ratio for the top 25 holdings that make up the SMH ETF of 19.7. It's also well below the median PE ratio of those same 25 stocks of 17.2. It, in some ways, suggests that Intel could see further multiple expansion in the future.
One reason why that multiple may expand is that the company reported strong fourth quarter results on Jan. 23. Earnings beat analysts' estimates by 21.4%, coming in at $1.52 per share. Meanwhile, revenue beat estimates by more than 5% at $20.21 billion. The company also provided earnings guidance of $5.00 per share for 2020, which was well above consensus analysts estimates for $4.68 per share. Also, revenue guidance was strong, coming in at $73.5 billion vs. estimates of $72.25 billion.
Additionally, the market had been pricing in no growth for Intel in future years, but now that has changed. Currently, analysts estimate that earnings will grow in 2020 to $4.99 per share, an increase of about 2.6% over 2019. That is far better than the prior forecast for earnings estimates to decline by 4.6% to $4.64 per share. Additionally, they are now looking for revenue to rise by 2.6% to $73.8 billion, which also is up from their prior view for no revenue growth at $72.2 billion.
Traders have been actively betting that Intel's stock rises since the middle of January. At that time, traders were buying the September 18 $75 calls. Since the company has reported results, it appears they have once again returned, but this time buying the $85 calls. Staring on Jan. 30, the number of open contracts at the $85 strike price has risen by about 17,000 contracts. According to data from Trade Alert, the calls were bought trading on the ASK. It's a bet that the stock increases to over $85 by the expiration date.
The pattern is similar to what we witnessed at the $75 strike price. In that case, it appeared traders were merely buying deep out of the money calls as a bet that the stock would rise as an inexpensive way to gain access to a stock price increase. It appears the same may be happening here. Once the stock price rocketed higher, traders seemed to have sold most of the calls. It can be seen in the sharp decline in the open interest in the chart below, and the options trading on the bid.
The stock has been consolidating nicely in a trading range of $64 and $69. Meanwhile, the bullish trend in the technical and the relative strength index suggests that the stock continues to rise in the future. Should it rise above resistance at $69, it seems likely that its next level of resistance would come around $71.50, a price that dates back to around the year 2000, and an increase of about 6.3% from its current price of approximately $67.25 on Feb. 11.
However, should the stock fail to break out and fall below support at $64, the next significant level of technical support would not come until $59.75. That would be a drop of about 11%.
Overall the wind appears to be at Intel's back, and an unexpected improving business outlook should help lift shares further during the next several months. Traders are betting on it.
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This article was written by
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.