Intel Corporation (NASDAQ:INTC) will report earnings on Thursday. Intel stock has rallied over 18% since last earnings.
For the most part of the year, shares semiconductor company Intel Corporation (NASDAQ:INTC) had remained flat, heavily underperforming the broader market, while other semiconductor companies like AMD (NASDAQ:AMD) and NVIDIA Corporation (NASDAQ:NVDA) continued to handsomely reward their shareholders. Comparatively slower revenue growth and the threat from AMD's latest launches had kept Intel stock under pressure. However, in the last three months, especially after its second quarter earnings Intel stock has seen a strong bullish rally. Intel stock is up over 18% in the last three months. Intel stock has strong momentum going into its third quarter earnings which it is scheduled to announce on Thursday, 24th of October. The question is should you buy Intel stock going into the third quarter earnings?
Can Intel deliver another earnings beat?
Analysts expect Intel to report non-GAAP EPS of 80 cents per share, flat from the last year same quarter earnings according to Yahoo Finance. The lack of growth in the current quarter earnings is a bit disappointing. The earnings will be impacted by the contraction in both gross as well as operating margin. Gross margins is expected to fall from 63.3% to 61% while operating margin is expected to contract by 110 basis points to 27.4%. However, for the full year, Intel expects EPS growth of around 10%.
When it comes to delivering on analysts estimate, Intel has beaten consensus earnings estimate in each of the past eight quarters, which is a pretty good track record. Moreover, the beat has been convincing. And if you go by the so-called earnings whisper, Intel is likely to deliver an earnings beat again in the third quarter. The current whisper number for Intel Q3 earnings is 82 cents, 2 cents higher than the street estimate.
On the top line front, analysts expect Intel to report revenues of $15.73 billion, which is marginally lower than $15.78 the Chipzilla had reported in the same quarter last year. The lack of growth in earnings and revenue is one of the reasons for Intel's poor stock price performance. When it comes to delivering on analysts estimates, Intel has delivered top line beat in 6 of the last eight quarters. The declining PC sales have been a major drag on Intel's revenue. For the third quarter, both Gartner and IDC forecast a 10 percent sequential increase in shipments, however when compared to third quarter last year, PC shipments fell 3.6 percent to 67 million units, marking the twelfth consecutive quarter of declining shipments.
AMD is targeting Intel's server business.
Apart from slow growth, another factor which had weighed heavily on Intel stock is the perceived threat from AMD in the server business. Intel enjoys near monopoly in the server business with over 99% market share, hence Intel can only go lower from here. However, AMD is looking to claw back some market share from Intel in this segment. A few months back, AMD launched its EPYC server which has received very positive reviews. AMD’s EPYC isn’t the better choice in every situation or environment. But a combination of lower prices and competitive performance will allow AMD to lure some customers, especially hardware cost-conscious companies. AMD has already signed up big customers like Microsoft and Bidu.
AMD is also supposedly gaining market share from Intel, even in CPU segment. According to data from the German retailer mindfactory.de, AMD accounted for 54% of total CPU revenue in August 2017, and a 56% share of the market, on a volume basis. However, according to a recent report by Citi research, AMD will not be able to compete with Intel's new "Coffee Lake" line of processors. Citi said benchmark reports showed AMD Ryzen processors underperformed Intel's new chips by around 20 percent. "This month, Intel released its latest CPUs, which appear to have extended its performance lead … We see the competitive environment for AMD CPUs getting more difficult over time as the competition continues to introduce new processors," Citi analyst Christopher Danely wrote in a note to clients.
Will Mobileye acquisition pay off for Intel?
Intel is looking to close the Mobileye (OTCMKTS:MBLY) acquisition by the end of this quarter. Intel had agreed to acquire Mobileye for over $15 billion earlier this year. Considering that in FY 2016, Mobileye reported a revenue of just around $358 million, many analysts think that Intel has massively overpaid for this acquisition. However, Intel believes, Mobileye will help it gain a strong footing in the rapidly growing autonomous driving market. Mckinsey estimates that autonomous vehicles will make up 15% of the total car market in 2030, which means about 15 million autonomous cars sold annually in less than 15 years. This is a huge opportunity.
However, considering the size of the deal, it is likely to have a negative impact on Intel earnings in the next couple of quarters. The costs will include integration costs and restructuring charges. Investors must keep an eye on management's commentary relating to Mobileye's merger costs.
On the whole, while you can expect Intel to deliver another earnings beat, there is unlikely to be any steep gains in Intel stock immediately following the earnings. Intel stock remains a good long term bet with reasonable valuations, several growth potentials, strong balance sheet, good profit margins and attractive dividend yield.
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