An Oversold Tech Opportunity?

Alex is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Earnings season in Wall Street is an interesting time. Some parts of it are predictable, others are not. Usually surprises come because a company posts better -or worse- earnings compared to the “analyst consensus.” While there's some mystery in trying to guess if a company will beat the earnings (or will fall short), what usually isn't surprising is what happens to the stock prices once earnings are out: When earnings exceed analyst expectations, then the price goes up, when they don't, the price goes down. Simple. However, there are always some exceptions.

One of the most drastic exceptions to this common sense norm happened on Friday Jan 18, when technology platform maker Intel (NASDAQ: INTC) posted earnings that beat analyst expectations by $0.03 ($0.48 EPS vs the Street's consensus of $0.45 EPS). The stock, which had been trading at $22.7 the day before, closed at $21.25. That's a 6.31% drop, which is very significant for a stock with a market cap of almost $106B. Essentially, Intel's stock returned to its Jan 8 price, erasing the almost 7% rally that the stock had experienced leading into Friday, and reducing its year-to-date gain to barely 3%. Nothing strange had earnings fallen short, but that wasn't the case. So, what's going on with Intel?

  • Current valuation ratios are not thought to be an indicator of future earnings: Intel trades at 9.97x, which is low, compared to other similar companies, like NVIDIA (NASDAQ: NVDA), which trades at 15.06x, Texas Instruments (NASDAQ: TXN), at 21.99x, or most any other technology blue-chip (a P/E of 23.72 is the average in the semiconductor industry). These low valuations would suggest investors do not believe Intel can improve earnings in the future. However, even Intel's forward P/E is only 10.17, which is still one of the lowest in the industry.

<table> <tbody> <tr> <td><strong>STOCK</strong></td> <td><strong>P/E</strong></td> <td><strong>Forward P/E</strong></td> <td><strong>Dividend Yield</strong></td> </tr> <tr> <td>Intel (INTC)</td> <td>9.97</td> <td>10.17</td> <td>4.24%</td> </tr> <tr> <td>Nvidia (NVDA)</td> <td>15.06</td> <td>12.68</td> <td>2.47%</td> </tr> <tr> <td>Texas Instruments (TXN)</td> <td>21.99</td> <td>18.73</td> <td>2.51%</td> </tr> </tbody> </table>
  • The analysts' average target price of $22.83 (which implies a 7.4% upside from Friday's close) is also seen as either inflated or on track.
  • Investors seem not to believe that Intel's current attractive dividend (it yields 4.24%) is sustainable. This might be a legitimate worry when taking into account that Intel wants to heavily invest in their manufacturing infrastructure, therefore reducing the company's cash reserves.

The Bottom Line

In essence, Intel has fallen out of fashion. The current tablet and smartphone boom has made many investors regard PC's (Intel's current lifeline) almost as a historical relic. To some of these investors, investing in Intel is like investing in horse carriage wheel manufacturers when everybody was starting to buy cars. Maybe so. However, Intel might be able to expand its business into the tablet-smartphone sector, and, to be fair, PCs are not yet going anywhere. All in all, while I am not necessarily bullish on Intel's future, I do believe that Friday's 6% drop was an overreaction, and I expect Intel to recover some lost ground. With regards to going long on Intel, a quick look at the fundamentals seem to suggest this might be a great value play, especially when compared to its competitors, with the added benefit of having a nice dividend yield to sweeten the wait. However, if the company fails to expand to other sectors and continues to be excessively reliant on the PC market, Intel could become the dreaded value trap after all.


wheckster has no position in any stocks mentioned. The Motley Fool recommends Intel and NVIDIA. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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