- Intel Corporation stock has handily outperformed the S&P500 this year. Can the rally continue?.
- Bullish sentiment has dropped since mid-September meaning that higher prices are probable in the short term.
- Technically the stock has broken through a long term resistance. However, due to its high valuation, I would not be chasing here.
Intel Corporation (NSDQ:INTC) stock has had an excellent trading year to date. The stock is up over 10% which means it has handily beaten the S&P 500 (INDX:SPAL) which is up just 5.7% so far this year. In mid-month, the stock spiked aggressively from the $35 level due to Intel increasing its guidance for its third-quarter results this year. In fact, the company increased its top-line guidance by an estimated $600 million to bring the expected quarter turnover to $15.6 billion. However, I would caution investors not to go all in on Intel shares after this announcement. Why? Well, the vast majority of the guidance increase is due to increased demand for PC components. While obviously over the next few quarters there are going to be demand spikes in PC's, realistically this sector is going to continue to decline over the next few years as more and more customers turn to mobiles and laptops for their computing needs. Long-term investors know that it will be the non-pc segment and specifically the data center group which will provide the growth in Intel's bottom line going forward. Personally, I would not be a buyer with the share price at these levels for the following reasons.
Intel's Average Earnings Multiple Is Much Lower than Its Current Level
The obvious argument about Intel at present is its valuation. The stock is trading at an earnings multiple of 18.3 which is a full six points above its five-year average of 12.4. Even if we look as its average earnings multiple over a 10-year period, we still come out meaningfully lower at around the 16 mark. The midpoint between these two figures is 14 which is an accurate number I believe for the company's average price to earnings ratio. Therefore based on 2015 earnings per share results, this means that I would value the stock at just over $32 a share. As I mentioned in the first paragraph demand for PC components could fall off as quickly as it came. We saw this in 2014 when there was a spike in PC demand but this was followed by a lean year in 2015 when the company reported an 8% drop in PC derived revenues. I believe the same will happen here. We will probably get, as outlined already in the company's guidance, robust sales on the PC side in the near term but 2017, due to the cyclical nature of this industry, will probably again turn out to be a lean year.
Sentiment Levels Are Stating That There Is Still More Upside On A Short Term Basis
This is not to say though that there won't be more short-term strength in Intel stock. As we can see from the sentiment chart once Intel announced its increased guidance for its third-quarter earnings, sentiment actually dropped substantially. I view sentiment as a contrarian indicator which basically means that the more bearish investors are about Intel the more bullish I personally get. Remember Intel is a stock with multiple competitive advantages. Smart money will always enter into a stock like this if it feels the stock is too oversold at any given point in time. This is why I believe there is more upside in Intel stock at present but probably only on a short-term basis until its earnings multiple can catch up. In fact,the stock will probably go over $40 a share in the near-term before we get a nice correction back down to somewhere around the mid-thirties.
Can The Break-Out Hold?
On the technical front, the stock has definitely broken out of a long-term trading range. The market definitely seems to like the work Intel is doing in 5G and the Internet of Things (IoT). The company is investing a lot in these areas at present despite the fact that investors will not probably see any meaningful gains in earnings over the next few years. However, despite Intel boasting a huge R&D budget, the company is going to come up against stiff competition in these two high-growth areas. Multiple ongoing acquisitions will have to be seamlessly integrated into the company to ensure we get the robust growth shareholders are looking for. Therefore, don't expect this stock to turn into a high flyer just yet.
To sum up, Intel stock price may have broken out of a long-term trading range but I feel the recent rally will give back most of its gains. The stock is overvalued when compared to its historic multiples and I for one would not be chasing here. Intel stock is still in my opinion worth just over $32 a share at present which means it may be a hold (for dividend investors) but certainly not a buy.
Also see: Amigobulls latest top technology stock picks.