Risks Are High For Intel Following Results

Apr. 21, 2020 12:37 PM ETIntel Corporation (INTC)15 Comments

Summary

  • Intel's stock is expensive heading into quarterly results on Thursday.
  • Options traders are betting that Intel drops below $56.
  • Meanwhile, technical charts are pointing to even lower prices.
  • Looking for a helping hand in the market? Members of Reading The Markets get exclusive ideas and guidance to navigate any climate. Get started today »

Intel (NASDAQ:INTC) will report its results on Thursday after the close of trading. However, the stock appears to be already reflecting a lot of optimism trading with a valuation that is at the upper end of the historical range.

The stock may find itself trading lower following results based on some recent options betting, which suggests the stock falls to $56 or lower, while the technical chart indicates it falls back to $50. The stock was trading around $59 as of April 21.

First Quarter Results

Analysts currently see first quarter earnings rising by 41.6% to $1.26 per share, and revenue rising by 15.7% to $18.6 billion. Those estimates have declined by 3.4% and 1.9%, respectively. Full-year forecasts have been falling too, and are now forecast to decrease by around 3.8% in 2020 to $4.70 per share. In the meantime, 2021 earnings estimates have remained relatively unchanged and are expected to rise by approximately 4.7% to $4.91 per share in 2021.

ChartData by YCharts

However, the stock appears to be trading at an expensive level on a historical basis. Factor in what could be a murky and uncertain outlook, and the stock should likely trade with a lower earnings multiple. Currently trading around 12.5 times 2021 earnings estimates puts the stock at the upper end of its historical trading since 2017 of 9 to 14. It means that for the stock to continue to rise, it would need to see earnings estimates for this year and next year rise, which in the current environment seems challenging. In this weak environment, it seems more reasonable for the stock to trade closer to that range of 10 to 11 times one-year forward estimates.

Betting Shares Drop

Traders appear to be betting that the stock falls in several ways through puts and calls. For example, the $60 put options for expiration on May 15 rose by 5,300 contracts on April 21. The contracts traded on the ask for a price of $3.92 per contract. It means that for a buyer of the puts to earn a profit, the stock would need to fall to around $56.

Additionally, traders are betting against Intel by selling calls. For example, on April 21, the open interest for the June 19 $62.5 calls rose by 4,144 contracts. These calls were traded on the bid and were sold for $3.20 per contract. It means that the trader received the premium, and as long as the stock stays below $65.70, the trader will, at a minimum, keep part of that premium.

The Chart Is Breaking Down

The chart for Intel looks very weak and indicates that the stock could fall much further. The stock fell out of a bearish reversal pattern known as a rising wedge. If the stock falls below support around $56, it could result in the equity falling to around $50.

The relative strength index is also turning lower, suggesting that momentum is leaving the stock. The RSI would have to fall rather significantly, because it is currently at a level around 50, and would need to fall to 30 or lower to signal the stock is oversold.

Risks

The big risks center around the broader stock market, which has been very volatile, with sectors and stocks moving in a herd-like mentality. Additionally, earnings will clearly be the most significant risk, as visibility appears to be cloudy. Still, it is possible the company sees better than expected results or even reiterates or ups its guidance, as unlikely as it may seem.

Additionally, the chart shows that if the stock gets above $60, it could go on to climb to around $63.

The backdrop for Intel appears not to be so bright, and results are likely to act more as an adverse event than a positive one. This may especially be the case, given the stock's current valuation, and the technical and options market setup heading into those results.

The focus of Reading the Markets is to find stocks that may rise or fall using fundamental, technical, and options market analysis. Additionally, we search for clues from the broader markets to discover trends and gauge direction.

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This article was written by

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Designed for investors looking for stock ideas and broader market trends.

I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on 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.

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