The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology – Senior Analyst at I Know First.



Intel Stock Forecast: Take Advantage of the Post-Earnings Dip in Intel’s Stock Price

Summary:

Intel did its Q2 2016 earnings report last Wednesday.

Intel’s stock traded down during after-hours trading even though the company beat Q2 EPS estimate.

This downtrend is understandable. Intel’s lay-off of 12,000 employees caused $1.4 billion in impairment. This is why Q2 2016 net income is down 50% Year-over-Year.

Intel’s stock will lose some of its gains it made over the past few weeks. However, the stock will eventually recover to $35+++. This company is still a long-term leader in server and desktop processors.

It might be wise for investors to exploit the post-earnings dip in Intel’s stock.

Intel (INTC) reported its second-quarters earnings this year. Intel had revenue of $13.5 billion in Q2 2016, $40 million lower than the expected $13.54 billion. However, Intel managed to beat the estimated $0.53 non-GAAP EPS by achieving 59 cents in earnings per share.

Before it reported its earnings last Wednesday, INTC posted a 30-day gain of more than 10%. Unfortunately, INTC dipped (-3.25%) during after-hours trading after the company reported its Q2 financials. It was likely that several institutional investors did some profit taking – or they wanted out before the post-earnings bear run over Intel.

(Source: Google Finance)

My Recommendation

Small retail investors should wait and see how low INTC will go during the next two weeks. Wait for the institutional investors to dump their INTC shares so that you can get a cheaper buy-in window. Aside from its consistent dividend payments, Intel is worth adding to your long-term portfolio because of its unchallenged leadership in data center server and desktop PC processors.

With more than 99% market share in enterprise/data center server processors, Intel remains a compelling buy for defensive investors. Intel is not in danger from the vaporware threat of ARM-based server processors. So much noise has been created for ARM-based servers since 2011. However, not even Advanced Micro Devices (AMD), IBM (IBM), or Qualcomm (QCOM) has come up with a real alternative to Intel’s pricey server-class x86 Xeon processors.

One of the highlights of yesterday’s earnings report is CEO Krzanich’s bullish expectation that Intel will receive stronger orders for its server-class processors this 2H of 2016. Due to their incompatibility with custom legacy Win32 enterprise software, ARM-based processors are unlikely to win any major support in the data center industry.

The biggest data center operators like Google (GOOG), Amazon (AMZN), and Facebook (FB) are still dependent on Intel Xeon processors for their server farms. As long as firms like Google buys thousands of $550+++ Intel Xeon processors quarterly, Intel’s profitability and growth prospect is insured.

The current server market is still like it was four years ago when eight giant firms like Google accounted for 75% of Intel’s revenue from server processors. IBM, Qualcomm, and AMD simply has failed to make a headway in ARM-based processors.

Unlike the declining desktop PC processor industry, the server-centric Data Center Group division is still posting positive annual growth. As you can see from the screenshot below, sales of processors intended for enterprise servers was up 5% year-over-year in Q2.

(Source: Intel)

Restructuring Is Short-Term Pain

Intel’s announced lay-off of its 12,000 employees is also another reason why I see the stock price going down. The near-term pain of restructuring its workforce and company focus is going to drag down Intel’s earnings. The restructuring charge is already obvious – Q2 2016 net profit is down 51%. This is largely due to Intel taking an impairment of $1.4 billion (higher than previously estimated $1.2 billion) the previous quarter.

Intel will again incur another $200 million in restructuring impairment in the next coming quarters. The expected $1.6 billion restructuring impairment is a near-term inducement for the sell-side to pummel down INTC. However, the restructuring cost will eventually lead to Intel saving around $1.4 billion in annual expenses starting next year.

Conclusion- Intel Stock Forecast

Intel’s brave decision to retreat from mobile processors to focus on data centers and Internet of Things products is judicious. Going forward, Intel is no longer burdened by 9-figure operating losses incurred in subsidizing x86 Atom processors for tablets and smartphones. Intel is right in quitting the race-to-the-bottom pricing of mobile chips.

It was estimated that Intel lost $10 billion trying to push x86 processors against ARM-based phone/tablet processors. Without the burden of contra revenue on mobile processors, Intel has more resources to protect its 99% market share in server-class processors.

My long-term positive buy recommendation for INTC is also backed by the bullish long-term algorithmic forecasts from I Know First. INTC touts a one-year algorithmic forecast score of +62.27. It means the predicted market trend is that INTC’s stock price is more likely to go up (rather than go down) after 12 months.