On Nov. 20, Intel (INTC 0.64%) hosted its annual investor meeting. In general, I think the event went very well and believe management did a good job of helping investors understand where Intel is today and where the company is headed. After reviewing Intel's presentations, I now believe the company's stock is poised to surge past $40 over the next year.
Digging into guidance
Intel guided to "mid-single digit" revenue growth for 2015, to $58.6 billion, off a base of approximately $55.8 billion in 2014. It also expects gross profit margin of 62% and operating expenses of 20%. The company didn't explicitly guide to an expected tax rate, but we can probably comfortably assume approximately 28%.
These numbers suggest Intel is on track to generate approximately $16.32 billion in operating income and about $11.75 billion in net income. Given the 4.86 billion shares currently outstanding, this implies full-year earnings per share of $2.42 at the midpoint of the company's guidance.
Even a modest multiple yields a meaningfully higher share price
Although Intel stock is not likely to command a premium multiple, I don't think the stock needs much in the way of multiple expansion to see a meaningfully higher share price.
For context, the S&P 500 currently trades at 19.89 times earnings. If investors apply a 17 times multiple -- approximately where it is trading as of writing -- to Intel's projected $2.42 in earnings, then this would yield a stock price north of $41, or 14% upside from the price ($35.97) as of writing.
Keep in mind that Intel may be sandbagging estimates
While Intel CFO Stacy Smith guided to PC revenue dropping slightly in 2015, Kirk Skaugen, the general manager of the company's PC client group, was significantly more upbeat during his presentation. While he did not issue any formal guidance that contradicted to Smith's guidance, he seemed to assert that the CFO's view the PC business for next year might be on the conservative side.
While I wouldn't build a "base case" investment thesis on Intel having "sandbagged" its expectations, I do think management now tries to play it safe when it comes to guidance. It seems, at least to me, that for Intel, the midpoint of the guidance range now is the "bare minimum" mark for success, with the company working feverishly to do better than that midpoint.
The future looks quite bright
It's also important to step back and realize that Intel's business is in good shape and has potential to be in great shape. If Intel can, in the long term, keep its PC business flat to slightly up, and if it can really deliver on the 15% compound annual growth rate that it projected for its data center business through 2018, then this is already a solid growth business.
The mobile opportunity is also very exciting. Intel expects that the loss associated with its mobile group should decline from about $4 billion in 2014 to roughly $3.2 billion next year. As Intel heads into 2016 with minimal to no contra-revenue support required for its tablet products, and as the company ramps up its chip volumes, the losses in that division should continue to shrink dramatically, bolstering the bottom line.
All told, I think there's plenty of room for Intel to grow its overall corporate profitability in the years ahead. If Intel can continue to execute in markets in which it is strong and improve its execution in mobile, then my expectation that the stock will trade above $40 over the next year could prove quite reasonable.
