Intel Corporation’s Shares Could Surge to $32 as PC Sales Strengthen

Intel (INTC -0.38%) announced after the close on June 12 that it was revising its revenue outlook for the current quarter (fiscal Q2) rather materially from $13 billion +/- $500 million to $13.7 billion +/- $300 million. Along with that revenue blowout, the company also announced that gross margins would be coming in at a whopping 64% at the midpoint, edging out prior expectations of 63% at the midpoint. Let's take a closer look at what happened here and what this means for the future of Intel's stock.

What drove this blowout? Corporate PC sales
As Microsoft's (MSFT 1.65%) Windows XP has now gone end-of-life (i.e., no more support from Microsoft), businesses and even consumers using systems based on this operating system have been driven to upgrade to systems with later Microsoft operating systems and faster Intel processors. While it was always known that the end of Windows XP would drive revenues up for Intel's PC Client Group, it is unlikely that many -- if anybody -- expected a surge of this magnitude.

That said, it will be interesting to hear on the July 15 earnings call how shipments of chips into consumer PCs fared as well. The decline is still likely going on there, but the magnitude of that decline is probably shrinking as the tablet market shows signs of saturation. Further, Intel -- by virtue of the successful ramp of its low-cost Celeron/Pentium products based on the low-power Atom architecture -- probably gained nontrivial share at the low end market, which may have further fanned the PC reinvigoration flames.

Revising 2014 sales estimates, though traditional seasonality may not hold
With Intel's Q1 and Q2 more or less done, it's probably worth revising full-year earnings estimates. Below is a table comparing Intel's 2013 and 2014 (with estimates) revenue on a per-quarter basis.

Source: Intel; Ashraf Eassa estimates

If traditional seasonal patterns hold, then we end up with a table that looks something like this:

Source: Intel; Ashraf Eassa estimates

But it may not be prudent to assume traditional seasonality off of what may have been an unusually strong quarter, so more conservatively modeling very subseasonal growth in Q3 and Q4 at 2%, respectively, yields the following:

Source: Intel; Ashraf Eassa estimates

At any rate, these estimates are still quite a bit higher than where consensus of $53.12 billion sits today.  

How about earnings and the stock price?
The company actually revised its gross margin outlook for Q2, but also revised up quarterly and full year operating expenses. In particular, while full year gross margin has not been formally updated, we can probably assume that the full year will come in the range of 62-63%. Operating expenses now look like they'll be coming in at $19.2 billion, and the tax rate should come in within spitting distance of 28%.With this in mind, we have the following simplistic model for the full year:

• Revenue of about $54.6 billion
• Gross margin percentage of 62.5%
• Operating expenses of $19.2 billion
• Tax rate of 28%

This leads to operating income of $14.9 billion and net income of $10.75 billion, equating to roughly $2.16/share in earnings. Applying a 15x multiple (which is the current multiple) to that number yields a target price of $32.40/share or about 16% upside from the most recent close.

Foolish bottom line
This is welcome news to Intel investors, particularly as the PC market had been fairly weak over the last couple of years. While the company isn't out of the woods yet -- it remains to be seen how long this renewed strength in PCs can continue -- at the very least this year's estimates look too low, which means that the share price could move up rather nicely from here.