We Intel (NASDAQ:INTC) investors have enjoyed a constructive market ride recently. Shares of the semiconductor giant raced 30% higher over the last three months, more than doubling the performance of the S&P 500 market barometer over the same period.
Today, Intel's valuation is resting well above the stock's 5-year averages whether you measure these things by earnings, cash flows, or the company's book value.
Can Intel maintain these lofty valuation levels, or is the stock overdue for a correction?
The long view
PC systems may not be the hottest commodity anymore, but laptops have made a bit of a comeback in recent quarters, and server hardware is certainly here to stay. The company missed the boat when smartphones and tablets entered the market, but even those mobile devices depend to a large extent on big-iron servers in a data center somewhere.
Beyond that stalwart market, Intel is busy exploring new markets such as automotive computing and extremely fast memory chips. A long-running collaboration with memory chip specialist Micron Technology (NASDAQ:MU) is ending in 2019, but Intel will continue developing NAND memory technologies on its own after that.
All things considered, Intel seems to have a solid long-term plan in place. Keep in mind that shares still trade at just 15.6 times trailing earnings at a time when your average semiconductor stock fetches a 26.8 P/E ratio. Very few peers can match Intel's generous profit margins, rock-solid balance sheet, or sheer scale. This is the kind of sector-defining titan that really should demand a premium valuation compared to its lesser peers, leaving plenty of room for further gains. It would take a lot to make Intel shares look expensive.
What if I'm more nearsighted?
So, the long-term picture looks solid, but Intel's stock chart could certainly have a bumpy ride toward that distant future.
The company is set to report fourth-quarter results next Thursday, and that could change things in a hurry. For example, the healthy third-quarter report triggered an 8% jump in Intel's share prices the next day. A year before that, the third-quarter results of fiscal year 2016 inspired a 6% single-day price drop instead. There's no such thing as a free lunch, and you never really know what the market reaction to next week's news will be.
That being said, Intel's guidance for the upcoming quarterly report points to top-line sales of roughly $16.3 billion and adjusted earnings near $0.86 per share. The company hasn't missed an earnings target since the end of 2013, so these targets should really be seen as more of a baseline.
Now, Intel has been in some hot water recently. A pair of security issues were unveiled in December, based on design choices embedded deeply into modern semiconductors. The so-called Meltdown and Spectre exploits have triggered patches to pretty much every operating system on the market, but these fixes will also slow down computers to a significant degree.
Intel's stock didn't exactly suffer a meltdown when these issues were revealed, but this earnings report would be a great time for Intel to set the record straight. Going forward, it would be great to know whether the company plans to change its hardware designs in response to Spectre and Meltdown.
So, keep an eye on this report. Its contents could very well move Intel's share prices by several percent in a hurry.