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Intel Corporation Stock Looks Maxed Out as It Heads Toward $60

I’ve been a big fan of Intel Corporation (NASDAQ:INTC) for a long time.

The company is transitioning its business from low-growth, PC-centric to hyper-growth data-centric. That shift gives Intel broad exposure to big growth markets like data centers, the Internet of Things (IoT), artificial intelligence (AI), self-driving and automation. INTC stock, however, continued to trade at low-growth, PC-centric multiples.

That combination had me pounding on the table about INTC stock in 2017, calling it the cheapest way to play the AI revolution.

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Since then, INTC stock has rallied above $40, has rallied above $50, and is now heading toward $60.

But this is where I think you hit the pause button. The stock looked great below $40 and good below $50. But as it closes in on $60, the stock is also closing in on its fair value, considering mixed growth prospects through robust data-centric growth and tepid PC-centric growth.

As such, whereas I was a buyer below $40, I am now a seller of INTC stock as it closes in on $60.

Here’s a deeper look.

Beware of a Narrative Shift

For the past several months, the narrative surrounding INTC stock has been largely positive.

The company has continued to launch new data-centric products, the sum of which have propelled consistent market share gains in key growth markets like data centers, IoT, AI and self-driving. The numbers have supported this strong qualitative story, and revenue and profit growth have continued to accelerate upward as the data-centric business shift plays out seamlessly.

But that could change in the coming months.

Intel is delaying production of its 10nm Cannon Lake chips to next year. But competitor Advanced Micro Devices, Inc. (NASDAQ:AMD), who is also eyeing big gains in the server chip market, is preparing for next-gen 7nm chip production this year.

That means that in the back-half of 2018, the window is open for AMD to gain market share and for Intel to lose market share. That could cause a dramatic shift in the presently upbeat narrative surrounding Intel stock, which in turn could cause multiple compression and some material and lasting weakness in shares.

Intel Stock Isn’t Priced for Much to Go Wrong

I wouldn’t be terribly concerned about that medium-term narrative shift if INTC stock were cheap.

But it isn’t. Thus, the long-term growth prospects are tepid at best, while the near- to medium-term growth prospects are quite bleak.

Intel’s business is now a 50/50 split between data-centric and PC-centric. On the data-centric side, revenue growth is roaring along at 20%-plus, and operating margins are zooming higher. On the PC-centric side, revenue growth is grinding along in the low single digits, and operating margins are falling.

Considering the current 50/50 split, that combination of huge data-centric growth and mild PC-centric growth is leading to high single-digit to low double-digit overall revenue growth and flat to slightly up margins. Over the next several years, the data-centric business should cool down due to scale, but it should also be the primary driver of revenues and margins.

As such, growth will slow into the foreseeable future but not by much.

By my estimates, this is a 5% revenue growth company going forward with a 60-65% gross margin profile and a 30% operating expense rate. Under those assumptions, I think it is reasonable to say Intel nets around $4.80 in earnings per share in five years.

A market-average 17-times forward multiple on those $4.80 earnings implies a four-year forward price target of nearly $82. Discounted back by 10% per year, that equates to a present-day value for INTC stock in the mid to upper $50s.

Bottom Line on INTC Stock

This stock used to be the cheapest way to play the AI revolution. After a huge 60% rally over the past several months, that is no longer the case. As Intel stock closes in on $60, valuation is starting to become a concern, and that is especially worrisome considering the narrative could shift in the back-half of 2018 from positive to negative.

Consequently, Intel stock looks maxed out to me here and now.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 

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