Is Intel a Buy?

Shares of Intel (INTC) have ticked up slightly on Tuesday on the back of strong results for the first-quarter of 2016, driven by growth in an expanded portfolio of business. In fact, its shares have gained approximately 13% in the past ten weeks, after reaching its lowest level of $28.03 a share on February 10. However, its shares are still below around 7% year-to-date. This drop in its shares, in my view, creates an opportunity that investors should not avoid. Let us see why?

Restructuring initiatives to fuel its financial performance

Intel’s restructuring initiatives caught my attention during the broadcast of the first-quarter results that I believe should enable the company to concentrate efficiently on new profitable business such as the data center and Internet of Things.
With these initiatives, Intel plans to speed up its evolution from a PC company to their more cost-effective businesses such as the cloud and billions of smart, connected computing devices.

Therefore, Intel, with an aim of driving value and growth for the customers has augmented its investment to the tune of $20 billion in 2016 in the products and technologies and MG&A. This investment should stimulate growth for the data center, memory & connectivity businesses, IoT and in client computing such as 2-in-1s, gaming and home gateways going forward. Intel perceives an increase of 2 ZB global data traffic by 2019 with 5G innovation from client to cloud, which will allow the company to tap into 50 billion connected devices by 2020. Thus, additional focus on these areas before 5G hits the market in real time should enable the company to knock this growth in tomorrow’s network resourcefully and efficiently.

More importantly, the Internet of Things alone provides an opportunity to the tune of $15 to $18 billion in by 2020. The company expects IOTG in retail to grow at CAGR of 20%, in transportation & automotive by CAGR of 30%, and 10% each of CAGR growth in energy and markets & channel accelerations such as gaming health and print imaging, and smart Home & Buildings.

The most important thing is that the company with this transformation is expected to lay off around 12,000 employees across the world, thus reducing its workforce by almost 11% by mid -2017. This drop in workers will allow the company to save approximately $1.4 billion per year going forward. As a consequence to this, the company should be experiencing an increase in the bottom line performance going forward.

Thus, it isn’t surprising why the company is increasing its investments in the products and technologies in these phenomenon business segments. In fact, these business segments allowed the company to delivered approximately $2.2 billion in revenue last year, accounting for nearly 40% of the total revenue.

Even more importantly, the Datacenter and Internet of Things grew by about 9% and 22% respectively year-over-year in the first-quarter of 2016. Higher cloud and comms service demand helped the company to achieve this significant growth in the data center, while the performance of the video and retail verticals boosted its Internet of Things revenue. In fact, the company reported a 2% increase in the client computing group to $7.5 billion for the quarter, due to a reduction of 14nm in unit costs on notebooks, a fall in total spending and a rise in margin improvements in its mobile products.

As a result of this strong performance of the data center and IoT, the company reported revenue of $13.8 billion, operating income of $3.3 billion, net income of $2.6 billion and earnings of $0.54 per share in the first-quarter of 2016. These fundamentals were significantly up from the first-quarter of 2015. For instance, revenue grew by 8%, operating income by 13%, net income by 19% and earnings per share by 20%. In fact, the company witnessed an increase of 1.3 basis points in the gross margin that came in at 62.7% of the total revenue as compared to 61.4% of gross margin in 2015.

Looking ahead, Intel Corporation expects its revenue for the second-quarter to come at $13.5 billion, plus or minus $500 million, representing an increase of 2% compared to the second-quarter of 2015. Also, Intel anticipates its revenue to grow at mid-single digits in 2016, compared with 2015.

Conclusion

Intel Corporation thus remains attractive going forward and the investors should make use of the recent dip in the stock price performance, which is down approximately 7% so far this year. Its investments in the products and technologies for the data center and IoT should allow the company to tap the opportunities considerably as stated above. Moreover, the company, through these restructuring initiatives expects a significant reduction in the SG& A expenses that should lead to a much better performance for the bottom line going forward. So, all-in-all, Intel remains a good long-term play that investors should not overlook.
Published on Apr 26, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

Posted in ...