Intel Stock Poised for Growth
Know when to cut your losses. It’s a good rule for investors and business managers alike, which is why I’m happy to see Intel Corporation (NASDAQ:INTC) spinning off its McAfee division. The cybersecurity arm was nothing but a drag on Intel stock.
Analysts, myself included, were skeptical when Intel bought McAfee for $7.7 billion in 2011. (Source: “Intel Spins Out Security Business With Private Equity Help,” Fortune, September 7, 2016.)
There wasn’t a clear direction for how or why Intel stock would benefit from the deal; management just seemed to be following the trend. Cybersecurity firms were the flavor of the month at the time. That made it easier for Intel to justify paying a 60% premium for a company it didn’t need.
Five years later, a private equity firm called TPG is buying 51% of McAfee at a lower valuation, meaning it is worth less today than when Intel bought it. Put another way, Intel lost its bet on McAfee. But it’s not all bad news.
Intel stockholders will keep a 49% stake in McAfee, meaning they could still profit if the company functions better as a solo act. Better still, Intel will also collect a $3.1-billion paycheck from TPG. Critics would say the original deal should never have happened, but there’s little point in re-litigating that fight. No one likes a Monday-morning quarterback.
Even with the McAfee anchor attached, INTC stock managed to double in value over the last five years. Think about that: Intel stock grew by more than 100% despite the fact that its industry was falling apart. Not only were personal computer (PC) sales sputtering to a halt, but profit margins were getting squeezed by oversupply. There were too many competitors in the microchip space. Yet INTC stock doubled in value.
If Intel stock was capable of such growth when it serviced a dying industry, imagine what could happen now that it is making chips for a fast-growing industry. The gains could be staggeringly huge.
Watch Out for INTC Stock
The sale of McAfee gives Intel the financial freedom to really go after the cloud computing market. Selling integrated chips to companies that build data centers—Alphabet Inc (NASDAQ:GOOGL), Amazon.com, Inc. (NASDAQ:AMZN), and Microsoft Corporation (NASDAQ:MSFT)—turns out to be a goldmine for Intel. So I’m betting this new focus could send Intel stock surging by double or even triple digits. There’s just one, tiny catch.
Intel has to beat the competition first. Since there are dozens of chipmakers entering the cloud computing space, it will be a hard-fought battle, but one I think Intel can win. They have brand-name recognition, deep pockets, and most importantly, scale. The ability to build inexpensive microchips is essential to victory. In 99% of businesses, it comes down to price. Above a certain level of quality, customers just want to get the cheapest price possible.
Cloud computing revenues are now a vital artery for Intel stock. The company was famously late to the smartphone party, which made room for firms like Qualcomm, Inc. (NASDAQ:QCOM) to take a lead on mobile chips. That oversight made it doubly important for INTC stock to catch the next tailwind. The good news is that they are well armed for the coming melee, having already bought Altera Corporation for $16.7 billion. The acquisition gave them a range of chips that can be used for cloud computing, the Internet of Things (IoT), and other cutting-edge applications.
Like I said, they’re ready for this battle.
Considering the price-to-earnings multiple is only 17.66, I’d say Intel stock is trading way below its potential. New data centers are sprouting up all over the place, as are new IoT devices (like the “Amazon Echo”). The market should have priced all this potential into INTC stock, but that has not happened yet.
Dear reader, don’t be swayed by the familiarity and age of Intel stock. This company is on the edge of enormous gains specifically because it is already a technology giant. This is a common trend across the entire tech sector. Our team of analysts has identified several big-name tech stocks poised to deliver huge growth to their shareholders. If you’re interested, click here for the Exclusive Free Report.