Intel Corporation (INTC) Stock Has More Than 10 Percent Upside Potential

  • It has been discovered that the new iPhone 7 and iPhone 7 Plus GSM version features Intel’s modem.
  • Intel raised third-quarter revenue guidance due to improving PC demand.
  • The average target price of the top analysts is at $40.35, however, in my opinion, shares could go higher than that.

Two new developments have increased my belief that Intel Corporation (NSDQ:INTC) earnings are going to improve, and its shares can continue to climb. The first development is the launch of Apple's (NSDQ:AAPL) new iPhones. The second development is the raising of third-quarter revenue guidance by the company.

After studying the new iPhone 7 and iPhone 7 Plus components, it has been discovered that the GSM version of the phones features Intel’s modem, and only the CDMA version of the device features Qualcomm (NSDQ:QCOM) modems. Since GSM market share is estimated to be greater than 80% globally, and iPhone has high market share in the global smartphone market, it is a big market for Intel.

According to Chipworks, which has torn apart the new Apple smartphones, besides the modem, Intel's two RF transceivers and a power management chip are also included in the device. Orders from Apple represent the first major win for Intel's mobile chip program which had suffered massive operating losses. The use of Intel's modem in the new iPhone harms the dominance of Qualcomm in baseband processors that connect phones to networks and convert radio signals into voice and data. However, while Qualcomm is losing some orders, it is retaining a substantial amount of Apple’s business.

Also Read: Chips Delays Will Most Likely Drag Intel Corporation (INTC) Stock

On September 16, Intel announced that third-quarter revenue is expected to be above the company's previous outlook. According to Intel, the increase in revenue is primarily driven by replenishment of PC supply chain inventory. The company is also seeing some signs of improving PC demand. Considering Intel's dominance in the PC market (more than 80% market share), an improvement in PC demand could increase Intel's revenue and earnings significantly.

According to a report from research company IDC' on August 29, 2016, Worldwide PC shipments for the second quarter of 2016 declined 4.1% year-over-year. However, the decline was 3% lower than the expectations. The improvement, primarily in the United States, Western Europe, and Latin America, were partially attributed to rebuilding inventory. According to IDC, momentum from the stronger than expected second quarter was also undermined somewhat by continuing economic and political volatility, including exchange rates, commodity prices, Brexit, and related or similar factors across regions.

IDC Research also explained:

"Despite the challenges, PC shipments are gradually stabilizing, with some positive (albeit minimal) growth expected in 2018. Competition from other devices and longer device life have been the root causes of slower growth, but both are having less impact, opening the way to PC replacements, particularly in the commercial market. Although detachable tablet shipments continue to grow quickly, growth is slowing from a peak last year and volume has been less than 14% of notebook volume so far this year. Commercial notebook growth is expected to peak at almost 5% during the forecast while commercial desktop shipments will return to flat growth."

In one of my previous articles about Intel, I pointed out that Intel sees tremendous potential in its Internet of Things (IoT) business. Meanwhile, on September 26, Intel announced that new Intel technologies would deliver amazing experiences that would inspire creators at World Maker Faire taking place in New York on October 1, and 2. According to Intel, its passion and commitment to broadening the opportunities for people from all walks of life to both participate in and be exposed to the creation of new technologies will be in full effect at this year’s World Maker Faire. Although right now, Internet of Things contribution to the company's revenue and income is modest, in my view, with the new technologies, Intel can promote higher demand for its Internet of Things products. Internet of Things accounted for only 4.2% of Intel's revenue in the second quarter of 2016, and 4.7% of the revenue in the first quarter. What's more, the IoT operating income of $89 million in the second quarter and $123 million in the first quarter accounted for only 2.8%  and 3.7% respectively of the company's operating income in the first and second quarters of 2016.

Also Read: Should You Buy Intel Corporation Stock After The Movidius Deal?

Intel Stock Performance

Year to date, the INTC stock is up 6.9%, while the S&P 500 index has increased 5.1%, and the NASDAQ Composite Index has gained 5.3%. However, since the beginning of 2012, the Intel stock has gained only 51.9%. In this period, the S&P 500 Index has increased 70.8%, and the NASDAQ Composite Index has risen 102.3%. According to TipRanks, the average target price of the top analysts is at $40.35, indicating an upside of 9.6% from its September 27 price. However, in my opinion, shares could go higher than that. 

Conclusion

Two new developments could improve Intel's earnings and drive its stock. The first development is the launch of Apple's new iPhones, and the second is the improving PC demand. In addition, with the new technologies, Intel can promote higher demand for its Internet of Things products. The average target price of the top analysts is at $40.35, indicating an upside of 9.6% from its September 27 price. However, in my opinion, shares could go higher than that.

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