Intel: Risk-Reward Favors Being Long

| About: Intel Corporation (INTC)
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With Intel (NASDAQ:INTC) set to report earnings on Tuesday, we favor the long side of the trade. We believe negative sentiment around PCs, fears regarding growth of tablets, and macro headwinds are more than priced in, and profitability should remain robust driven by servers, Intel's highest margin segment.

In addition, Intel's attractive and extremely secure 3.3% dividend yield and ongoing share buyback program make it difficult to identify where investors will make money on the short side.

We are in the camp that believes AMD's (NASDAQ:AMD) recent earnings pre-announcement is largely company-specific, although we believe overall PC/notebook demand is at best tepid.

We think the market now widely expects Intel to guide 3Q below consensus. For example, Stifel recently cut its 3Q revenue estimate for Intel to $14.4 billion, up modestly from 2Q and well below the $14.8 billion consensus. We also anticipate Intel to guide below the Street, perhaps $14.0-$14.5 billion, but expect a relief rally for almost anything other than doomsday guidance.

Despite our positive view on Intel into earnings, we look at Intel as a trade as we have significant secular concerns regarding the growth of the PC/notebook market and the likely accelerating cannibalization of tablets and smart phones. While many bulls argue that Intel will gain share in these segments, and potentially even penetrate the Apple (NASDAQ:AAPL) supply chain, we believe it is more likely that Intel loses the "ARMs" race, and over time, will lose more share to ARM (NASDAQ:ARMH) in the notebook and server segments, than it will gain in smart phones/tablets.

We recognize this is a hard race to handicap, and certainly Intel has the muscle to spend aggressively on both r&d and fabs - look no further than its recent investment in ASML (NASDAQ:ASML) and 450mm wafer technology. Still, we believe momentum is on ARM's side. With the overhang of the incipient threat of ARM and fears regarding the death of the PC, it's hard to see what could drive meaningful multiple expansion.

We will watch the market's reaction to Intel's report with great interest. While much of Intel's results will be Intel-specific, should the company guide lower, the reaction will be a useful gauge for investor sentiment across the semiconductor industry. A relief rally on a weak, but not terrible, Intel outlook, would suggest the potential for a positive reaction to what we, and most, anticipate will be soft outlooks across the industry.

Disclosure: I am long AAPL.

DIsclaimer: We conduct thorough research on our ideas, but our views are our own. Please do your own research.