Here's How Intel Crushed Wall Street's (and Management's) Q3 Expectations

Semiconductor titan Intel (INTC -2.40%) reported third-quarter earnings Thursday night. Despite some troubling signs from other giants of this industry, Intel came up with a pretty fantastic quarter.

As a longtime shareholder, I was worried about this one. It feels great to be wrong sometimes. The stock surged 8% higher in response to this muscular report.

Intel's third-quarter results by the numbers

Data source: Intel. GAAP = generally accepted accounting principles.

What's new with Intel?

• Revenues were flat and earnings fell modestly, yet I'm calling this performance "fantastic" and "muscular." CFO Bob Swan called it "the best quarter in our company's history." Makes no sense, right? Well, posting solid results when every forecast had been pointing downward actually qualifies for all of those rosy platitudes.
• Management's guidance for this period had pointed to revenues near $18.0 billion and GAAP earnings of roughly $1.16 per share. The reported results blew both guidance and analyst estimates out of the water.
• Client computing, where Intel bundles chips destined for both consumer-grade products and professional-grade corporate workstations, saw revenues decline 5%, to $9.7 billion. So far, not so good.
• The data center group posted $6.4 billion of sales, 4% above the year-ago quarter. More on this below.
• Internet of Things (IoT) sales rose 13%, landing at $1.19 billion. Automotive computing products from the Mobileye acquisition led the way with a 16% year-over-year revenue jump.

Xeon Platinum 9200, part of the Xeon Scalable product line. Image source: Intel.

Management's color commentary

Intel's management took this opportunity to remind investors how big its chosen focus market of cloud computing really is. This is how the company produced the impressive data center sales seen above, resulting in overall surprises on both the top and bottom lines.

In the earnings call, Swan said:

Cloud workloads are diversifying, networks are transforming and more computing performance is moving to the edge. We've been on a multiyear journey to reposition the Company's portfolio to take advantage of this industry catalyst. The opportunity is massive. As we told you in May, we expect to generate $85 billion in revenue and $6 in EPS [earnings per share] in three to four years. But that doesn't happen just by saying it. Achieving this goal means delivering on our operational and financial priorities every 90 days.

The Xeon Scalable processor line is currently bearing the brunt of this effort, as the company shipped 23 million units since it was launched two years ago. That includes several big wins in the third quarter, which goes a long way toward explaining Intel's unexpectedly solid results. Swan listed large-scale installations of Xeon Scalable system by technology giants Amazon, Alibaba, and Alphabet, all of whom are major players in the cloud-computing space.

Keep in mind that all of these companies are struggling amid an unstable global economy and Chinese-American trade tensions. If they're inspired to place game-changing orders for Intel products under these circumstances, you have to imagine that we'll see an impressive spike when the trade war runs out of tariff-flavored bullets.

Looking ahead

Based on the results and business trends seen in the third quarter, Intel provided guidance for the next reporting period.

• Fourth-quarter revenues should stop near $19.2 billion, roughly 3% above the year-ago period's result.
• GAAP earnings are headed toward approximately $1.28 per share, while their adjusted counterpart was aimed at $1.24 per share. Hitting those targets would amount to a 14% year-over-year increase in unadjusted terms and a 3% decrease on the non-GAAP side.

For what it's worth, the current analyst consensus is pointing to adjusted fourth-quarter earnings near $1.26 per share on revenues in the neighborhood of $18.8 billion. Intel is aiming high here.

The upshot: Intel is a no-brainer buy

The stock now trades at a modest 12.1 times trailing earnings, in spite of doubling the S&P 500's gains over the last 52 weeks. I think there's room for further gains even after today's impressive spike in Intel's share prices.

Let's just say that I'm not selling any of my Intel shares here, and might even pick up some more once our Foolish disclosure policy allows it.