During the Oct. 18 trading session, shares of chipmaker Intel (INTC -2.86%) crossed $40 per share, a level that they haven't seen for nearly two decades.
In this articles, I'd like to go over two reasons why shares of this chipmaker are now hitting new multiyear highs.
1. Chip stocks are booming
A rising tide, as they say, lifts all boats, and that phenomenon is clear here. The iShares PHLX Semiconductor ETF (SOXX -3.54%), an exchange-traded fund (ETF) that aims to track the performance of the PHLX Semiconductor Sector Index, is up 35.15% this year, reflecting a boom in chip stocks. Intel is a significant part of this ETF, making up 8.25% of the dollar value of the index, so the rise of chip stocks is clearly going to help one of the industry's largest chip companies.
Intel stock is also a major holding of the PowerShares QQQ Trust (QQQ 0.66%) ETF which corresponds to the performance of the Nasdaq 100 index. Intel makes up 2.66% of that ETF as well, which could also be responsible for giving Intel shares a boost.
It's worth noting that Intel stock has underperformed both the iShares PHLX Semiconductor ETF as well as the PowerShares QQQ Trust, which takes some of the luster off the fact that the shares are trading at multiyear highs.
2. Intel is cheap
Right now, it's hard to find stocks with cheap valuations. Some investors, particularly value-focused ones, might be put off by the rich valuations of many of the hottest technology stocks in the sector.
Intel, at first blush, looks cheap: It's priced at just 15.4 times earnings as of this writing. By contrast, other large- and megacap chip names are trading at higher valuations. Contract chip manufacturer Taiwan Semiconductor Manufacturing Company (NYSE: TSM) now trades at 18.5 times earnings, Texas Instruments trades at just a hair above 23 times earnings, and NVIDIA commands a price-to-earnings multiple of nearly 57.
Now, I don't think buying a stock simply because it's cheap is a good idea; often stocks are, as they say, cheap for a reason.
Intel is cheap, I suspect, because investors don't expect a ton of growth from it. To put things into perspective, analysts expect Intel to generate $61.39 billion in revenue this year, representing 3.2% year-over-year growth, and they expect that growth to slow to just 2.7% for the following year. EPS growth is expected to come in at around 10.7% this year, slowing to just under 3% in the following year.
Compare this to, say, TSMC, which is expected to enjoy 7.9% revenue growth this year followed by another 7.9% revenue growth in the following year. Its EPS growth is expected to be 7.5% this year (slower than Intel's), accelerating to 7.9% next year (faster than Intel's).
This is a market that seems to highly prioritize revenue growth, so the amount that investors are willing to pay for a dollars' worth of a company's earnings is likely to be highly influenced by future revenue (and, to a lesser extent, profit) growth expectations. However, if Intel manages to deliver better growth than what analysts (and, by extension, investors) currently expect, then the stock could be rewarded with both a higher price-to-earnings ratio as well as higher raw earnings.