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It has been a rough couple weeks for Intel Corporation (NASDAQ: INTC ). At the beginning of June, INTC stock hit a multi-year high of $57. But ever since then, the stock has done nothing other than fall.
In early June, semiconductor stocks were hit on even more reports that global Apple smartphone demand is weakening.
In mid-June, Nomura Instinet pushed a note that cited Intel's CEO as admitting in a meeting with the firm that Intel will lose server share to Advanced Micro Devices, Inc. (NASDAQ: AMD ) in the back-half of 2018.
A few days later, Northland Capital downgraded INTC stock to "Underperform" on slowing data center growth concerns.
Then, Intel's CEO was pushed out for having a consensual relationship with an employee. Trade war tensions heated up. And analysts downgrades came pouring in.
Overall, INTC stock has dropped from $57 at the beginning of June to below $50 today.
But I think it may be time to buy the dip.
Amid all the negative headlines over the past month, Intel reported preliminary second quarter numbers which were well above consensus expectations.
The big driver? Accelerating data-centric revenue growth, which means that the company's big-picture growth narrative through a pivot into data-oriented businesses is only improving.
Meanwhile, below $50, INTC stock has dropped below its fair value, which I peg around $55. Still strong operating results coupled with a now discounted valuation makes me a buyer on this dip.
Here's a deeper look.
Intel's Data-Centric Growth Narrative Remains Strong
Escalating trade war tensions are bad. Intel has a ton of exposure to China. Meanwhile, the CEO departure isn't great news.
A management shake-up amid escalating trade war tensions and potential market share losses to AMD creates a significantly lack of operational visibility.
But trade war tensions should ease. I continue to believe that the net result of China-U.S. trade war talk in the big-picture won't be negative for U.S. companies.
Meanwhile, the CEO resignation was the right move, and the CEO had only been at the helm for five years, so the company isn't losing its long-term leader.
In other words, trade war tensions and the recent CEO resignation create noise in the near-term, but aren't big drivers in the big picture.
Instead, the big-picture driver is the company's shift to a data-centric business. And that shift is only getting better.
Intel recently announced preliminary second quarter numbers which were much better than expected, and pointed to accelerating growth in the company's data-centric business.
This isn't terribly surprising. Data-centric revenue growth has been accelerating for a while now. Last quarter, data-centric revenues rose 25%, versus 21% growth the prior quarter and 15% the quarter before that.
In other words, accelerating data-centric revenue growth has become the norm at Intel, and remains the norm today.
That means the company's overall growth profile is improving, margins are heading higher, and earnings are soaring. That is a winning combination for INTC stock.
Intel Stock Is Undervalued Below $50
Thanks to accelerating growth in the data-centric business, Intel's overall growth profile has done nothing but get better over the past few quarters.
Revenue growth this quarter is expected to be ~14%, versus 13% last quarter, 8% the quarter before that, and 6% the quarter before that.
Meanwhile, the data-centric business also has booming margins. Operating margins rose a robust 15 percentage points last quarter to 50%, driven by higher selling prices and significant operating leverage as a result of robust revenue growth.
All of this will slow over the next five years. Data-centric revenues can't accelerate forever, and higher competition from AMD and others will erode growth rates with time.
Plus, margins will max out soon, and the era of 15 percentage points of margin expansion won't last forever.
But, this is still a company with broad exposure to multiple secular growth markets, like data centers, the Internet of Things, and automation.
Due to this broad exposure to big growth, Intel will remain a growth company over the next 5-plus years.
During that stretch, I think it is reasonable to assume Intel grows revenues around 5% per year, while operating margins head towards 30-35%, from roughly 31% expected this year. Under those assumptions, I think Intel can net $4.80 in earnings per share in 5 years.
A market-average 17-times forward multiple on $4.80 implies a four-year forward price target in the lower $80's. Discounted back by 10% per year, that equates to a present-day value in the mid-$50's.
Bottom Line on INTC Stock
INTC stock has fallen on tough times recently. And because the stock was slightly overvalued in the upper $50's, those tough times have created intense selling pressure.
But the big picture growth narrative through accelerating data-centric growth is still improving. Meanwhile, recent weakness has plunged INTC stock into undervalued territory.
That combination of an attractive valuation against the backdrop of improving fundamentals makes INTC look like a buy the dip situation here and now.
As of this writing, Luke Lango was long INTC.
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