Intel’s Lower Expectations Provide a Strong Buying Opportunity
Rita is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The performance of a company does not depend on how investors perceive the company. However, sadly, the stock price gets highly influenced by investor perception and there are times when even a stock with great potential witnesses a price drop because of panic. Similar is the situation with Intel (NASDAQ: INTC). Last week the chipmaker announced that it expects weaker results in the coming third quarter and as a reaction the stock price dipped as much as 3.6% by the closing bell.
The Santa Clara-based company expects to clock third quarter revenues of $13.2 billion, down from the management’s prior expectation of $13.8 billion to $14.8 billion range and below the consensus estimate of $14.2 billion. Even the gross margin expectations were reduced to 62% from the initially expected 63%. However, one good point is that the company expects to report lower than initially expected R&D costs. Though Intel has lowered the outlook for the third quarter, the outlook for its Data Center business was still in line with the previous expectations.
The announcement has been made. The stock prices have already plunged. Now what? Will the stock price fall further or is the weakness already factored into the price? This is the part everyone is interested in. In my opinion, the weakness is already baked into the shares and all this has actually made Intel an even more attractive buy. The company has huge growth potential and has more to offer to the investors. Let me clarify how.
Low demand is about to end
Intel cited macroeconomic headwinds as a cause of this recent slowdown. The company has been suffering from reductions in supply chain inventory, lower enterprise spending and weaker demand from the emerging markets. The PC demand has been very poor lately and many biggies such as Dell and HP are burning just like Intel. Recently Intel came up with the concept of ultrabooks, but has not faced much success with this device. During the second quarter ultrabooks accounted for only 5% of all laptops sold while the cost of producing these ultrabooks accounted for 25% of total costs.
The high cost of the device and low sales volume are hurting the chip maker big time. However, this trend is not going to last forever. There is a speculation that consumers are waiting for Microsoft (NASDAQ: MSFT) to launch the Windows 8 platform in October and once that is done the consumers will start making purchases of ultrabooks and laptops. In fact, according to many industry experts, Intel is going to see a surge in the demand for its products ahead of the launch only as PC makers cut their prices on old inventories. Dell has already slashed the price of Inspiron to $700, while Lenovo has decided to put a price tag of $720 on its super thin laptops.
Possible entry into the Apple’s ecosystem
Apple’s (NASDAQ: AAPL) recent victory against Samsung can prove to be beneficial for Intel. The iPhone maker depends on Samsung to manufacture and provide the chips used in iPhones and iPads and surely this doesn’t make Apple happy. After all, no one likes to depend on the main competitor to provide key products. This can be a good opportunity for Intel. The company is well known for its superior quality chips and if Apple decides to shun Samsung and go ahead with Intel, that will mark Intel’s entry into the highly profitable smartphone and tablet space. Right now Intel is nowhere in direct line of competition with Apple and thus the iPhone maker won’t mind sourcing parts from the company.
More attractive than peers
Intel is also probably one of the best dividend plays in the market at the moment. The company is offering a dividend yield of 3.6% while trading at 9.4 times forward earnings. In the past, the company has witnessed five-year average earnings multiple of 17.1 times and 9.4 times seems to be pretty low in comparison to that. This is probably because the investors are not considering any growth at all and are factoring in the current weakness.
Intel’s forward P/E and dividend yield are looking much more attractive when compared to those from peers such as Microsoft and IBM (NYSE: IBM) . The Windows maker trades at 15 times earnings and carries a dividend yield of 2.6% only and even IBM isn’t looking more impressive than Intel as it trades at 12 times earnings while offering a dividend yield of 1.6%.
When it comes to growth also, Intel looks better. While AMD (NYSE: AMD) has grown in sales by 5.4% in the past 10 years, Intel has grown by 7.4%. Even AMD’s dividend yield is looking ridiculously lower than Intel’s at 0.5%. Intel is the undisputed champion of the processor market with a whopping 80% market share. The remaining 20% belongs to AMD. However, in the recent past AMD has shown good progress as it recorded lowering costs and improved profitability thanks to its “fabless” design. But still AMD is not looking better than Intel. Intel is a much bigger company with proven expertise and huge economies of scale. With almost 800% higher R&D expenses than AMD, Intel can afford to differentiate its product and innovate better.
I believe these points clarify why I think Intel has strong growth potential. The stock’s price may have plunged. But this doesn’t have to do anything with the fundamental strengths of a company. Intel is looking fundamentally strong with a strong line of products and with time the market will again push up the stock price. I am certain that the fourth quarter will be a much better one for the company and by this time next year Intel stock will be trading at a value much higher than at what it is trading today. In my opinion, the plunge in the share price is providing the perfect buying opportunity. Are you watching?
analyse360degree has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, International Business Machines, Intel, and Microsoft. Motley Fool newsletter services recommend Apple and Intel. Try any of our Foolish newsletter services free for 30 days. 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. If you have questions about this post or the Fool’s blog network, click here for information.