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Intel's Upgrade: The 3 Things You Need to Know

By Rich Smith – Mar 3, 2016 at 12:00PM

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Intel inside...your next smartphone? Seriously.

Intel (INTC -1.11%) shares have sunk 11% since the year began. But depressing as that fact sounds, it does at least mean that the stock is now cheaper to own for new buyers. And one analyst is doing its best to keep hope alive for Intel investors: R.W. Baird.

The news
Early Thursday morning, Milwaukee-based investment banker R.W. Baird announced a big upgrade of Intel stock from neutral to outperform. According to the analyst, Intel stock that costs about $31 a share today, and that Baird previously believed was worth $33, could now go as high as $38 -- and deliver new buyers as much as a 22% profit (plus a 3.5% dividend).

On its own, that recommendation may not mean much. But according to our data, gathered over 10 years of tracking the performance of Baird's stock picks, Baird ranks near the top 10% of the investors we follow on Motley Fool CAPS. Simply put, when Baird speaks, investors should probably listen.

Here are three things you need to know about this new upgrade.

Intel's 7360 baseband. A "solution" for Intel's smartphone problem? Image source: Intel.

Thing No. 1: The PC business still stinks
Baird begins its analysis on a down note: Intel may still be inside a lot of computers, but according to this analyst, the PC biz is still pretty bad. "Intel derives nearly two-thirds of its revenues from the PC market," says Baird. But PC sales in Q1 2016 are likely to decline 10% in comparison to Q4 2015 levels.

In short, if you're looking for a reason to buy Intel, you're going to have to look elsewhere.

Thing No. 2: The cloud is the future
And Intel aims to own that future. Quoting from here, we find Baird praising Intel's "data center" business -- servers that service Internet traffic on the cloud -- as achieving "sufficient critical mass ... to drive a resumption in EPS growth starting in 2017."

According to Baird, Intel is hoping to grow data center revenue 15% annually in future years. But even if Intel hits only "high single-digit" growth, that will be enough "to drive EPS growth starting in 2017 and in years forward" and deliver positive profits growth for Intel.

Thing No. 3: You'd better sit down for this one
And now comes the real revelation. For years, Intel has played second fiddle in the exploding global market for smartphones. But Baird sees hope for Intel even here.

Historically, companies like Qualcomm (QCOM -1.36%) have eaten Intel's lunch in this market -- and its breakfast and dinner, too. Indeed, just this morning investment banker RBC Capital came out with a new rating on Qualcomm that declares: "QCOM enjoys undisputed leadership and share in the smartphone market." And here at the Fool, our own Ashraf Eassa says Intel remains "very" far behind Qualcomm in the quality of its integrated chip solutions for smartphones.

But according to Baird, "Intel's LTE technology has matured" to the point that Baird sees Intel potentially winning a "tier-one smartphone" deal in the second half of this year. Baird doesn't say who exactly might incorporate Intel's chips into their smartphone, but just the prospect of Intel solving its smartphone dilemma is helping to lift Intel stock 1% this morning, and in a down stock market overall.

And one more thing...
Is that an overreaction to Baird's upgrade? Not necessarily. In fact, considering the analyst's respectable record of picking winning stocks, as recorded by CAPS, I'd say investors might be right to be getting optimistic. After all, in addition to all the other arguments in the stock's favor, Intel shares actually look pretty cheap today.

Priced just over 13 times earnings at last report, Intel shares sell at nearly a 25% discount to the valuation found at Qualcomm. And with Intel currently generating more free cash flow than its income statement reflects as "net income," Intel stock is arguably even cheaper than it looks on the surface.

Long story short, right now, today, Intel shares look attractive at their 13 P/E, 10% growth rate, and 3.5% dividend yield. And if Baird is right, and Intel is poised to outperform on strong revenues from data centers and smartphones?

Why, that just might make Intel stock a buy after all.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 270 out of more than 75,000 rated members.

The Motley Fool owns shares of and recommends Qualcomm. The Motley Fool recommends Intel. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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