Intel Stock: If You’re Not In Now, You’ll Kick Yourself Later

Intel Stock
Credit:iStock.com/Freestocker

Intel Looks Like a Value Trap But There Are Positive Developments

Intel Corporation (NASDAQ:INTC) is beginning to produce evidence that its focus on the Artificial Intelligence (AI) segment is paying dividends and reducing its dependence on the slowing PC segment.

After witnessing the growth of other chip companies in high demand areas, Intel, armed with its $18.0 billion in cash, has aggressively turned its sights on driving growth.

Yet the transformation process, while showing encouraging signs, will take time to execute and convince the stock market that Intel is no longer the same company.

Intel reported beating expectations in its second-quarter revenues and earnings. The takeaway from the quarter was not the surprise PC chips business, but the fact that Intel delivered a nine percent jump in its data center business and a 26% surge in its Internet of Things (IoT) business.

Both businesses are being targeted by Intel as focus growth areas. The IoT segment, which includes AI and autonomous vehicles, only accounted for about 4.87% of total revenues, but it’s on the right path.

And with the acquisition of Mobileye NV (NYSE:MBLY) just completed, the IoT unit should be able to generate big gains in revenues going forward.

The key unit to monitor going forward will be Intel’s newly formed Artificial Intelligence Products Group (AIPG), which is a merger of Altera Corporation, Nervana Systems, Xeon, and Xeon Phi.

The reality is the market is yet to be convinced that Intel is not the same old boring PC chip business. INTC stock gained less than one percent on the second-quarter results.

Also Read3 Reasons Intel Stock Could Grow in 2017

For traders, the fact that INTC stock has yet to react is a buying opportunity on the longer-term potential for a complete and successful transition to the new business model.

Intel stock has traded in a narrow range of $33.23 and $38.45 over the past 52-weeks. INTC stock is down 2.8% year-to-date and up a mere 1.4% over the past year.

intc

Chart courtesy of StockCharts.com

What INTC Stock Needs to Do

Now some would argue that Intel doesn’t yet deserve a higher multiple than the 11.88-times 2018 earnings.

On the surface, Intel looks like a value trap unless it can ramp up its AI and IoT segments.

Simply look at the weak comparative growth rates versus the much faster growing Advanced Micro Devices, Inc. (NASDAQ:AMD) and NVIDIA Corporation (NASDAQ:NVDA) shown in the table.

Revenue Growth 2017 2018
Intel 1.20% 2.40%
AMD 17.50% 11.90%
NVIDIA 19.40% 2.30%

(Sources: “Intel Corporation (INTC),” “Advanced Micro Devices, Inc. (AMD),” “NVIDIA Corporation (NVDA),” Yahoo! Finance, last accessed July 31, 2017.)

The relative revenue growth rates favor AMD and NVIDIA at this time, but the second-quarter showed some encouraging signs for those who believe Intel can play catch-up.

If Intel can continue to grow its AI and IoT business, including developing much faster processing chips that can cater to the increasing demands of these areas, then there is a good chance that INTC stock can rise in conjunction.

On the Intel stock chart, a sustained break at the $38.00 resistance could drive Intel stock to above $40.00 and establish a higher trading range.

Only time will tell, but I’m cautiously optimistic.