It is not unusual for a stock to fall following earnings that, at first glance, appear to be quite good. Usually, the reaction is understandable once you look beyond the headline Earnings Per Share (EPS) number. Sometimes it is something as obvious as a revenue miss that suggests that growth is stalling; more frequently, it is because of forward guidance from management that is lower than Wall Street was expecting and therefore pricing into the stock. Sometimes, though, not even those things explain a selloff, and that is the case with Intel (INTC) following their Q3 earnings release after the market closed yesterday.
Going in, Intel was expected to earn $1.10 per share, so the reported $1.11 was a beat. A small one, admittedly, but still a beat. Revenue of $18.33 billion was higher than the consensus estimate of $18.25 billion too. The report included forward guidance for Q4 adjusted earnings of $1.10 per share, once again better than Street expectations, which were at around $1.07 before the release.
So, what caused the nearly ten percent drop in the stock?
Well, it seems to be two things. The first was that the company’s Data Center Group, which has been driving a lot of growth recently, reported a seven percent decline in revenue to $5.91 billion, missing expectations for $6.21 billion. The second is that there was a significant reduction in margins in the quarter, with overall operating margin down to 27.6% from 33.6% a year ago.
Both of those are legitimate reasons for concern in some ways, but do they really justify such a big drop in the stock? Almost certainly not.
The Data Center Group underperformance is not a good sign given its growth record and potential but, if you do the math on the revenue numbers above, you will see that that business is responsible for less than a third of Intel’s total sales. A 10% decline in the stock because of a roughly 5% miss from a division that is responsible for around 30% of revenue looks a little overdone, to say the least.
The margin weakness too, is obviously not great, but really, is anyone surprised that in these times, customers are buying cheaper products wherever possible and squeezing for better deals?
In context, you shouldn’t be. That context is the 47% decline in revenue from businesses and governments that Intel reported in the release. Before you panic about that, though, that too needs to be understood in context. The previous two quarters had seen thirty percent increases in sales as the shift to remote work and schooling was taking place. If you look at it another way, the bump in revenue was artificially high and a correction back had to come.
There can be no doubt that even though they reported a slight beat on the both the top and bottom lines, Intel’s Q3 results were a bit disappointing, but not as disappointing as the movement in the stock might suggest. It seems that INTC is, as much as anything, being hit so hard because its numbers don’t fit into the current narrative of what constitutes "good."
For the market right now, growth is "good," but value is irrelevant.
However, should the mood begin to change, either as a result of the election, the resurgence of coronavirus or, god forbid, because the Fed or Congress slow down their handouts to banks, a very profitable company with a ton of cash on hand and P/Es of about half the market average may start to look pretty attractive again. That, and the proximity to recent lows after this move, is why INTC is worth considering for anyone like me who is old fashioned enough to believe that value actually matters.
There is a kind of irony to that, given the reputation of “tech” in general as being growth oriented. However, if you look back at big, established, profitable tech stocks that have traded well below average P/Es for a while you come across things like Microsoft (MSFT) and Apple (AAPL) and realize that such stocks don’t stay cheap for long and massive profits help smooth over the bumps along the way. INTC may not show the explosive gains that those stocks did after their periods out of favor, but after this move, the downside looks limited but with significant upside, and that’s good enough for me.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.