Intel Corporation Stock Is Currently Overvalued

  • Data center group revenue is growing but slower than expected. We need to see an uplift here in the back end of the year.
  • PC shipment declines need to consolidate as this segment is still Intel's mainstay. Higher prices are currently offsetting some losses.
  • When can Intel start selling chips to Apple? The recent licencing deal with ARM definitely is a step in the right direction.

When shopping for a good dividend paying stock, it is wise to monitor the respective company's valuation. Intel Corporation (NSDQ:INTC), for example, is currently trading at an earnings multiple of 17.5 which is much higher than its 5 year average of 12.4. With the second quarter results now out of the way, the company's earning per share on a trailing twelve-month (TTM) basis is $2.07 a share. Now analysts are predicting that Intel's earnings for fiscal 2016 will turn out to be $2.50 per share which will still be $0.17 per share better than 2015. Even if Intel meets earnings estimates and if the share price remains at $36+ per share, its earnings multiple at years end will be 14.43 which is still over 2 points higher than its long terms average.

This means that in fact, Intel is not a buy in my opinion until it drops to at least $31 not just from a PE point of view but also from a fundamental point of view. I can't stress enough the importance of buying quality dividend stocks at good valuations. A $20k investment in Intel today would yield an investor around $577 in annual income. However, if the stock managed to drop to $31 a share this year and we still take the annual dividend payout of $1.04/share, the investor would now be able to pick up 645 shares instead of the original 555. The extra shares would now mean that the net annual income would climb to $670. The question now becomes whether I believe the stock will drop 5 to 6 handles going forward. I think it will and when it does, dividend investors, especially, should be ready.

Data Center Group Revenue Growth Not Strong Enough

Although shares have recovered from the $34 level (where they dropped to after second quarter earnings were released), I'm still not convinced that revenue growth is going to be meaningful in the quarters to come. Just look at DCG (data center group) which continues to grow at a much slower rate than was previously expected. The new 14 nanometer processor is definitely predicted to make waves at the back end of this year. Furthermore, management stated that cloud spending was patchy for the first 6 months of the year and the back end will be much better. Again, this remains to be seen.

PC Shipments Need To Improve

Secondly, investors should be watching if PC shipments in general, can improve in the near term as this will be favorable for Intel's traditional business. Why? Because no matter what way you size it up, Intel's non-PC segments are not growing fast enough to offset the declines in the company's mainstay. Furthermore, Intel can't rely on PC chip prices being more expensive than normal due to demand spiking for higher end devices. Job cuts which are expected to save the company around $1.4 billion in operating expenses will definitely buy the company time if PC shipments continue to fall (see chart). However, the company's non-PC segments such as Data-center and IOT (Internet of Things) are still unproven with respect to dependable revenue growth rates despite their strong profit margins in recent quarters.

4e

Intel Could Be In line To Pick Up Some iPhone Orders

Intel's developer forum in San Francisco held a few weeks back was interesting in the sense that the chip maker will now be licencing technology from ARM holdings. Furthermore, it was reported that LG electronics will become a customer which on the surface looks bullish for Intel's smartphone chip segment. Intel has to increase market share in this area sooner rather than later as it is evident that the company has missed the boat in mobile thus far.

However, it may have one thing in its favor. Apple, for example, has always had to turn to Samsung for its Ax chip supply. No matter what way you look at this, the Samsung deal hasn't been good for iPhone as Samsung is also a major smartphone manufacturer. With this latest licencing deal, Intel may be able to get in on the act here eventually and start selling chips to Apple. Again there has been a lot of hype surrounding this potential partnership. If it does come off, the company should see a sizable spike in its annual revenues.

To sum up, Intel is still around 14% overvalued in my opinion despite its encouraging fundamentals. Investing in Intel, for income especially, is all about getting your entry price correct. The stock is still trading at an above average earnings multiple and has consistency problems in IOT and DCG growth at present. Wait for a pullback to at least the $31 level before going long here.

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Comments on this article and INTC stock

Dex4Sure
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Don't know about that. Intel could definitely grow past $40 with their upcoming Optane drives (3D XPoint) and in the future they may be powering the high end smart devices as well. Its all about cutting down the energy consumption for their chips. Intel is far ahead of Qualcomm when it comes to raw performance of the chips.
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