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Stock Analyst Update

Expect Intel's Growth Streak to Continue

We're raising our fair value estimate on the wide-moat firm but recommend a wider margin of safety before buying.


 Intel (INTC) reported fourth-quarter results that far surpassed our expectations, predominantly due to a resurgence in data center growth. As the firm continues to ramp its recent Skylake-based server processors, customers have flocked to the cutting-edge offerings, spurring impressive average selling price increases. Meanwhile, Intel has controlled costs well, as evidenced by recent operating margin expansion of 430 basis points to 29.2% for 2017. Furthermore, the firm’s sizable U.S. based manufacturing operations and earnings generation have allowed it to benefit from the recent U.S. tax reform, with a forward effective tax rate of 14%, down from 20% on average in recent years. After rolling our model and incorporating new tax assumptions, we are raising our fair value estimate to $41 from $36 per share. Nevertheless, we still recommend a wider margin of safety for prospective investors, as we don’t believe the market fully considers the execution risk faced by wide-moat Intel as it pivots away from PCs into artificial intelligence, or AI, and automotive.

Fourth-quarter revenue rose 4% year over year and 8% when excluding the McAfee divestiture, to $17.05 billion. As expected, client computing group, or CCG, sales were down 2% year over year at $8.95 billion, which is consistent with the declines in the broader PC market. CCG includes both PC and mobile businesses, and given Intel’s increasing modem share in the Apple iPhone, we surmise PC revenue was understandably lower. Data center group, or DCG, revenue increased 20% year over year, with the cloud and communication service provider, or CSP, market segments up 35% and 16%, respectively. Given the tepid spending environment for CSP, Intel has likely gained share in this market. Enterprise spending in DCG was also up 11% year over year during the seasonally strong quarter, though we expect this market segment to resume low-single-digit declines going forward due to the ongoing shift to the cloud.

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Abhinav Davuluri does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.