Shares of Intel (INTC -0.38%) have run up by nearly 26% year to date, performing roughly in line with the Nasdaq index. The company's shares underperformed the Nasdaq for most of the year, but after Intel reported strong earnings results last month, the stock surged, allowing it to catch up with the index.
Nevertheless, despite the run-up in the stock, the company's shares are still quite cheap. Intel currently projects that it'll generate $2.93 in earnings per share this year, meaning that as of the stock's Nov. 10 closing price of $45.58, investors are paying about 15.56 times this year's expected earnings per share for the stock.
Image source: Intel.
That's downright cheap.
A question worth asking, then, is this: Why is Intel stock so cheap?
Analysts don't expect much growth
Generally speaking, the higher a company's price-to-earnings ratio, the more optimistic investors are about that company's ability to grow its profits in the future. To gain some insight into why Intel commands the price-to-earnings ratio that it does, it's worth checking out the analyst estimates for the company's earnings per share over the next couple of years.
Analysts expect Intel's earnings per share to grow to just $3 per share in 2018 (up just 2.4% from Intel's 2017 earnings per share projection) and then to $3.19 in 2019 (up 6.33% from projected 2018 levels). Revenue growth is also expected to be underwhelming as well; the average revenue growth estimates for 2018 and 2019 are 2.69% and 3.22%, respectively.
Image source: Intel.
At Intel's analyst day earlier back in February of this year, the company said that it expects "low-single-digit" revenue growth over the next three years, with operating income growth outpacing revenue growth and EPS growth outpacing operating income growth.
The analyst estimates seem consistent with Intel's own statements.
Since analysts -- and by extension, investors -- don't expect much earnings growth, the amount they're willing to pay for each dollar of Intel's earnings is necessarily going to be low.
Could Intel do significantly better than expectations?
Predicting future revenue and earnings growth is hard, particularly as there are many factors outside of Intel's control. For example, Intel raised its financial projections for 2017 several times because it saw better-than-expected performance in its core personal computer chip business.
Underlying Intel's revenue growth projections are two big assumptions. The first is that its personal computer chip business will decline at a "low-single-digit" percentage rate. The second is that the company's non-personal computer chip businesses -- or, in Intel's words, its "growth" businesses -- enjoy "double-digit" revenue growth in aggregate.
For Intel's financial performance to do significantly better than what the company is guiding to, it'll need to see at least one of the following things happen:
- An acceleration in its data center business from Intel's own "low-double-digit" revenue growth projections, or
- growth in its personal computer chip business.
At this rate it's hard to know how either of those businesses will ultimately play out next year, let alone in the following years. For quite a while now, Intel's personal computer chip business has outpaced the company's (and Wall Street's) predictions, while its data center business has underwhelmed investors.
Predicting the future is hard. But if either, or both factors I mentioned play out, then there could be upside compared to current analyst revenue and EPS estimates. How things will ultimately shake out should become clearer as 2018 progresses.
