Is Intel Stock Still a Bargain at $28 Per Share?

Shares of chipmaker Intel (NASDAQ: INTC  ) have powered nicely higher in 2014, rising 8.8% even as the Nasdaq is up only 3.9% year to date. As the stock's price has risen and the company has regained its status as the world's most valuable chipmaker by market capitalization, edging out mobile behemoth Qualcomm (NASDAQ: QCOM  ) , are the shares still a compelling buy?

The PC market is stabilizing and could return to growth
Over 60% of Intel's revenue base is dependent on the company's performance in the PC market. While the overall market has remained soft as tablets have become more popular, Intel has been aggressive in trying to drive more attractive notebooks, convertibles, and even desktops at ever-lower prices in order to try to win back consumer wallet share (as well as market share against longtime rival Advanced Micro Devices).

If you look at Intel's year-over-year unit growth numbers in both notebooks and desktops over the last couple quarters, you'll see that the company's efforts have been surprisingly effective. Overall PC unit volume was up 3% in the fourth quarter of 2013 from the year-ago quarter, and up another 1% year over year in the first quarter of this year from first-quarter 2013. While Intel is shipping more lower-cost products to drive volume growth, those products carry a good cost structure, allowing for gross margins to stay flat-to-up.

As Intel pushes further into the realm of convertibles -- particularly with its more expensive Core processors -- it stands a pretty strong chance of returning its PC client group to year-over-year growth even as the "traditional" clamshell/desktop market stays weak. The line between tablets and PCs is blurring, and if Intel can successfully push its products into those converged devices then this would be a pretty big "win" for the company.

Tablet market likely belongs to Intel
Intel CEO Brian Krzanich has indicated repeatedly that the company is on track to ship north of 40 million tablet processors for the year. If Intel is successful, then it will have gone from a minuscule player in the market to a company with a 15%-20% share of the estimated 260 million tablets to be shipped this year. Excluding Apple iPad, which research house BlueFin says should ship about 76 million units this year, this works out to over 22% of the non-Apple tablet market. Pretty solid, right?

If Intel could do this kind of growth with its Bay Trail/Merrifield/Moorefield processors, then next year with an improved product lineup there's no reason why it can't gain even more share. At this point, it looks as though Intel will wind up being the world's leading merchant chip vendor for the tablet market. Once the company works through the bill of materials issues associated with this year's platforms, next year's tablet platforms should be sold for a pretty solid profit per unit.

Datacenter group looking good
While there's a lot of hype around ARM (NASDAQ: ARMH  ) based servers, it's tough to see any of these players competing meaningfully with Intel over the long haul. Intel has a cost structure edge on these players, a wide and deep software compatibility moat, more efficient transistor technology, a larger research and developent budget, and a solid grip on the software and peripheral hardware that is sold as part of a server platform (SSDs, various software, NICs, InfiniBand, etc.). The company forecasts 15% compound annual revenue growth for its datacenter division through 2017, but given that the company has had difficulty hitting this number in recent years, it's probably safer to assume more along the lines of 10%-12%. Still, that's not bad at all for a nearly 50% operating margin business!

Smartphones could be upside, but let's wait and see
By far the largest-growth market that Intel has open to it is in smartphones. The company has virtually zero smartphone applications processor share, but has been investing heavily over the last three years to try to breach this market. While there's a good chance that Intel can become a viable second source to Qualcomm in this space, the open question is really around the timing.

If Intel can drive a similar campaign to its 40-million-tablet effort with smartphones (perhaps 100 million smartphones) during 2015 with its upcoming SoFIA and Broxton processors, it could drive some rather nice revenue upside (if we assume $15 platform average selling price for phones, this could mean an additional $1.5 billion in revenue). However, this is an area where I'd want to wait on Intel's upcoming investor meeting for additional color.

Foolish takeaway
At $28 per share, Intel trades at about 15 times trailing 12-month earnings. It's not dirt cheap, but if the company can eventually erase the $3 billion per year loss on mobile that it is incurring today (and even drive it to profitability), grow the datacenter group by a low-double digit CAGR, and stabilize PC client group sales, then the stock could easily trade in the mid-$30s to low $40s over the next couple years. That said, there are a lot of "ifs" there, so keeping an eye on the company's execution will be critical.

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Read/Post Comments (8) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On June 11, 2014, at 11:20 AM, tempest669 wrote:

    It's difficult to see how Intel can move up to 15-20% of the tablet market that quickly, or make any significant strides in smartphones. They've botched many of their opportunities previously, cannot get the parts out on schedule, and Qualcomm has locked the most lucrative markets down.

    I agree Intel does not have much to worry about with ARM servers. ARM servers have been available for last 4-5 years and only have a nominal percentage of the server market. The ARM server story is hype. They're a tiny, tiny player in the server markets. Intel has much bigger competition that is not going to give away their market share.

  • Report this Comment On June 11, 2014, at 11:40 AM, will1946 wrote:

    Qcom's PE is 21 and nobody complains about it being expensive.

  • Report this Comment On June 11, 2014, at 12:40 PM, guest1 wrote:

    @tempest it's not that difficult since INTC is providing a superior chip at competitive prices to makers willing to use their products. I believe that Intel Inside ® still has that cachet especially to white box mfg who have never had access.

  • Report this Comment On June 11, 2014, at 1:04 PM, tempest669 wrote:

    @guest1, it is difficult to see. Intel has a nominal portion of the mobile market. To say Intel can explode sales like that when there is still debate they can properly decode/recode Android apps, they've failed to get distribution out on their stated timeframes, and there is lead time necessary on parts availability for manufacturers to release the goods, yes that is difficult to see. Just because they are big in PC's does not mean they are efficient in their supply chain.

  • Report this Comment On June 11, 2014, at 2:28 PM, raghu78 wrote:

    Ashraf

    what a typical Ashraf article. Intel continues to dominate servers. ARM ecosystem does not make a dent in servers. Intel becomes No.1 tablet merchant vendor in 2015. Intel grows PC business. blah blah blah. The truth is ARM ecosystem taking share from x86 PC market. Apple most likely to eat further into x86 PC notebooks/2-in-1 convertibles with iPad Pro 12.9 inch in H1 2015. Intel PC business not yet stabilized. Mobile division bleeding heavily.The server market share challenges start in 2015 but really intensify in 2016. Anyway keep up the pumping. Lets see how the actual fiscal year results turn out to be in 2014 and 2015.

  • Report this Comment On June 12, 2014, at 5:11 AM, rav55 wrote:

    EU JUST SLAPPED DOWN INTEL!!!

    GOTTA LOVE IT.

    What are the losses this year for stupid decisions?

    $0.95 BILLION down the tubes for "Contra Revenu". And counting!!!

    $1.43 BILLION down the tubes for illegal rebates.

    Time to delete Otellini. Clearly under his leadership Intel is incapable of making rational and legal decisions.

    Spin this Ashraf!

    RTFLOL

    RTFLOL

  • Report this Comment On June 12, 2014, at 5:25 AM, rav55 wrote:

    $1.43 BILLION = $0.28 per share loss.

    2012 it was $1.2 BILLION

    2013 it was $3.1 BILLION

    2014 it is so far $0.95 BILLION

    2014 EU slap down $1.43 BILLION

    INTEL BLEW $6.68 BILLION in shareholder value to block AMD from the Tablet market!!!

    That is $1.34 per share loss! Intel would be in the mid $40's if they would just do business without breaking the law and making stupid decisions.

    "Contra Revenue" is one of the reasons for this hit.

    WHAT ARE THEY SO AFRAID OF?

    AMD has a market cap of $3.1 BILLION about $2.2 percent of the size of Intel's $137 BILLION cap.

    When are you folks going to wake up and DEMAND accountability from INTEL leadership.

  • Report this Comment On June 12, 2014, at 9:15 AM, GirlsUnder30 wrote:

    Anyone looking for a good summary analysis of Intel should click the link below:

    http://caps.fool.com/Blogs/the-intel-on-intel/912149

    ...and recommend it so others will notice it too.

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