Intel Stock Is Dirt-Cheap, and Here’s the Math to Prove It

Overreaction to immediate problems, and the markets ignoring the chipmaker’s transitions makes INTC stock a contrarian buy.

After a huge rally to start 2019, shares of Intel (NASDAQ:INTC) have fallen off a cliff over the past few weeks due to two overbearingly negative catalysts. First, the chip giant reported ugly quarterly numbers which sparked a worrying selloff in Intel stock to $50. Then, management gave a dour three-year outlook at the company’s investor day, and that dragged shares down to $45.

Broadly speaking, Intel is amid a huge pivot from a PC-centric to a data-centric business. While this pivot expands the company’s addressable market, aligns the product portfolio with secular trends, and paves the path for healthy revenue growth over the next several years, it also comes with operational challenges. Namely, Intel won’t be as dominant as it was before, competition will be a bigger headwind, and margins will come under pressure.

Those challenges have spooked investors. That’s why INTC stock has slid more than 20% over the past few weeks.

But in the big picture, the PC-centric to data-centric pivot comes with more positives than negatives. Therefore, buying Intel stock on weakness in the midst of this pivot seems like the smart move. That’s why I’m bullish on INTC here. The near term may be choppy, but the long term looks quite good.

PC-to-Data Transition Is More Good than Bad

As I mentioned earlier, Intel’s business shift from PC-centric to data-centric is a positive.

Long story short, Intel has long been the king in the PC and server markets with 90%-plus market share. However, those markets are all dried up. All the growth now is in data-driven markets, like data centers, Internet of Things and artificial intelligence. Intel doesn’t have huge share in those markets. Still, the company is aggressively pivoting into those markets and aligning its product portfolio to grow with the data boom. In so doing, Intel is expanding its addressable market and ensuring that its business will continue to grow for the foreseeable future.

To be sure, this pivot comes with its own set of challenges. Intel isn’t king in data like it’s king in PC. Further, less dominance implies more competition, more operational volatility, and lower margins. That’s why Intel guided for gross margins to drop over the next few years at its investor day. That scared investors and sparked an immense selloff in INTC stock.

But these challenges aren’t big concerns, and they won’t stick around forever. Gross-margin erosion will be offset by opex leverage. Plus, steady revenue growth will power consistent profit growth over the next few years. Thereafter, scale will likely drive gross-margin stabilization or even improvement.

Thus, gross-margin erosion concerns are unnecessarily short-sighted. In the broader scheme of things, the PC-to-data shift is an enormous positive for Intel, and it creates a better future for INTC stock.

Intel Stock Is Dirt Cheap

When it comes to INTC stock, a big part of the bull thesis is simply how cheap the semiconductor’s equity is considering its robust exposure to all things AI and data. After the recent selloff, shares are now cheaper than they have been in a long time.

Currently, Intel stock trades at 10 times forward earnings. That’s well below the market average forward multiple of 16 and the semiconductor average forward multiple of 14. Yet, Intel has broad exposure to big-growth industries, is gaining share in those sectors, and projects as a low single-digit profit and revenue grower over the next several years. This is roughly average for the semiconductor space. Also, INTC pays out a 2.5% yield which will incentivize investors to remain patient while the data pivot plays out.

Thus, there is no reason for INTC stock to be trading at this crazy discount.

Long term, management projects that $6 in earnings per share is doable in the long run. I agree. Let’s assume Intel maintains a rather pedestrian low-single-digit revenue growth rate, with stabilizing gross margins. If operating margins also move north of 32%, then $6 in EPS is entirely doable by fiscal year 2025.

Based on a semiconductor average 14x forward multiple, that implies a FY2024 price target for Intel stock of $84. Discounted back by 8% per year, that equates to a FY2019 price target north of $55. Thus, around $45, shares look dirt cheap.

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