How Can Intel Stock Get to $40 Per Share?

With Intel's (NASDAQ: INTC  ) stock now trading within spitting distance of $30 per share, investors buying today (as well as those continuing to hold the stock) are likely looking for sizable long-term gains going forward. With that in mind, let's see if it's reasonable to expect shares of Intel to get to $40 over the next couple of years.

Intel is not a "high multiple" company -- but that's OK
Intel is a fairly mature, mega-cap company (that is, its market capitalization tops $100 billion), so by virtue of the fact that the company is so large and considering that it has captured most of the profits in its fairly large core markets, it's not likely to be an exceptionally fast grower. As a result, this is not a stock that is likely to command a high price-to-earnings multiple. Realistically, a range of 13-17 times earnings (depending on sentiment and future expectations) is what investors should expect going forward.

So, with that in mind, a stock price of $40 per share would suggest that Intel drives somewhere in the range of $2.35 -- $3.00 per share in earnings. Interestingly enough, this isn't as difficult for Intel to achieve as it may have seemed before the company's recent upside pre-announcement.

Digging into the numbers
Per the article linked above, should Intel be able to grow revenues sequentially by just 2% over each of the next two quarters, then the company will have a line-of-sight to $54.68 billion in revenue for the year. At a 62.5% gross margin level, $19.2 billion in operating expenses, and 28% tax rate (all suggested by the recent pre-announcement), this should drive about $10.78 billion in net income, or roughly $2.16 per share.

Quarter

Q1

Q2

Q3

Q4

Total

2013

$12.58 billion

$12.8 billion

$13.48 billion

$13.83 billion

$52.7 billion

2014

$12.764 billion

$13.7 billion

$13.97 billion

$14.25 billion

$54.68 billion

Source: Intel, author estimates.

What's interesting, though, is that Intel's Mobile and Communications Group is losing north of $3 billion per year ($3.2 billion in 2013, likely closer to $4 billion this year). If this operating loss were wiped out (this would need to be as a result of revenue growth) -- and assuming that the rest of the business remained stabled -- then Intel could drive north of $18 billion in operating income. At a 28% tax rate, this would imply approximately $13 billion in net income.

The road to $40
If Intel is driving $13 billion in net income, that's about $2.61/share. Assuming a multiple range of between 13 and 17 times earnings, this gets us to a share price of between $34 and $44 per share. At 15.3 times earnings, Intel would become a $40 stock.

However, that's not to suggest that this will happen overnight. In order for Intel to wipe those Mobile and Communications group losses, it will need to ramp revenues from the $1.4 billion/year run-rate that we see today to somewhere between $7 and $8 billion (depending on your assumptions on margins, operating expenses, and so on).

Intel's smartphone push is vital
To get that kind of revenue, Intel will need to make an assault on the smartphone apps processor market, which is worth about $18 billion today and likely to be worth about $30 billion by 2018. 20% market share by 2018 would drive an incremental $6 billion in sales (Intel has no meaningful smartphone presence today, so it's all incremental). Further, if Intel can grab 40% of the forecasted $7.2 billion tablet chip market in 2018, then that's another $2.88 billion in sales.

In order to pull this off, Intel will need to grab share from Qualcomm, a formidable competitor that has the wherewithal to invest significant amounts into chip R&D. Further, since Qualcomm is the incumbent, it has much deeper relationships with the handset vendors which -- interestingly enough -- don't overlap too much with the PC/tablet vendors. From technological and business relationship standpoints, winning in smartphones won't be easy.

Foolish bottom line
If the PC market has truly stabilized, as Intel's recent pre-announcement suggested, then the growth in data-centers coupled with the erasure of the loss in mobile should be enough to drive earnings growth to justify a $40 stock price. This may not happen over the next six months to a year, but for long-term investors willing to be patient, Intel could deliver a cool 33% return over the next 2-3 years.

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