Intel (INTC 0.85%) is getting ready to report first-quarter results after this afternoon's closing bell. The chipmaker's stock has done well recently, more than doubling the returns of the Dow Jones Industrial Average (^DJI -0.35%) over the last year. More recently, Intel has surged 8% in the last month while the Dow came in relatively flat.
Much of the most recent climb comes from analyst comments, including two high-profile upgrades. But in the long run, there's really only one thing that matters to serious Intel investors. And here it is:
That's a 10-year perspective on the one thing that really moves Intel shares. When free cash flow dips, so does the stock. When it surges, Intel shares follow suit. The effect isn't always absolutely immediate, but it's undeniable in the long run.
Of course, this is exactly how stocks are supposed to be weighed. Discounted free cash flow analysis attempts to find the long-term value of a business based on the richness of its free cash flow. The analysis depends on a number of subjective assumptions, including future growth rates and the proper discount factor to account for investing in risk-free alternatives instead.
But it doesn't always work out that way. Intel is one of the purest examples I can find of free cash flow predicting the stock price. For example, fellow Dow component and tech giant Cisco Systems (CSCO -0.43%) currently trades much lower than a pure cash flow analysis would have predicted:
ExxonMobil (XOM -0.21%), on the other hand, has seen its share prices soar while cash flow dipped:
Investing is always complex, and cash flow alone can't make or break a stock. Cisco has been in full-fledged turnaround mode since 2011, for example, which doesn't inspire investors to pay the traditional quality premium for the company's shares.
And Exxon is investing heavily in new exploration and forward-looking oil alternatives, which prepares the petroleum giant for an uncertain future. That's a good thing, and worth paying a little extra for. If Exxon's investments work out as planned, the cash flow line should jump back up over the next few years. That might be worth a share price premium today -- but you must realize that there's some risk involved.
Back to Intel. Today's report will be packed with figures. Some will go up and some down; some are important, and others not so much.
The company doesn't offer cash flow guidance, but expects to report about $12.8 billion on sales and $2.4 billion of operating income, both within spitting distance from the year-ago report. Analysts are looking for 2% higher sales and a slight drop in bottom-line earnings per share.
But if you're interested in Intel as a long-term investment, the one number that really matters describes its free cash flow.
For your convenience, here's a look at Intel's free cash flow history in the last three years -- supposedly during the "death of the PC." Keep this one handy when you're looking at this afternoon's report.
INTC Free Cash Flow (Quarterly) data by YCharts.
