Ahead of Intel’s (NASDAQ:INTC) recently posted third-quarter results, the stock rallied, in accordance with its tradition. INTC stock rose steadily from $52 to $56 ahead of its earnings, only to plunge and close below $50 after the results were released.
Why did investors bet that Intel would beat analysts’ average expectations when the chip maker is falling behind its competitors? The giant used to sell premium processors. Advanced Micro Devices (NASDAQ:AMD) used to sell over-heated, under-performing processors at a discount.
The table turned in the last few years. But now Intel is finding its way back to growth, and it has many ways to reaccelerate its business.
INTC Stock Slumps After Intel’s Q3 Results
In Q3, Intel’s sales climbed by a modest 5% year-over-year to $19.2 billion. Its Data Center unit benefited from the record quarterly revenue of both Mobileye and its Internet of Things Group. Despite Intel raising its full-year 2021 earnings per share outlook to $4.50 and providing gross margin guidance of 55%, investors dumped INTC stock.
Markets expressed disappointment in Intel’s nearly flat revenue growth. The trading volume of Intel’s shares has reached levels not seen since January.
There are reasons to be disappointed in Intel’s results. The world is facing an unprecedented chip shortage, yet Intel’s revenue growth failed to accelerate and its margins did not climb.
On the other hand, Intel said that the demand for all of its unit’s products was strong. And all three of its main markets –PC, server, and Internet of Things – are expected to grow meaningfully going forward.
HP Inc. (NYSE:HPQ) reaffirmed Intel’s positive outlook. HP announced strong EPS, free cash flow, and will return at least 100% of its fiscal 2022 free cash flow to shareholders.
Dell (NYSE:DELL) traded at new 52-week highs as investors expected PC sales to be strong going forward. Dell’s VMWare (NYSE:VMW) spinoff is also helping its stock climb.
Intel’s Risks
Intel’s CEO, Pat Gelsinger, said that its margins would be pressured in 2022. He cited higher manufacturing costs, caused by the company’s efforts to meet its long-term goals, as a factor behind the margin pressure.
In the last quarter, the firm has been in the early phases of growing its networking business. It will take time for that process to unfold.
Intel is not benefitting yet from its entry into the discrete graphics card business. Still, AMD and Nvidia (NASDAQ:NVDA) are charging high prices for their graphics cards. But until Intel sells a high number of top-end GPUs, its overall revenue growth could disappoint investors.
A Growth Opportunity
Mobileye can boost Intel’s growth. The unit’s Q3 revenue jumped 39% YOY to $326 million, setting an all-time Q3 record. Its operating margins climbed 123% YOY to $105 million. Autonomous robotaxi services will eventually take off. When Mobileye, together with its partners, begins its driverless pilot in Munich in 2022, positive media coverage should attract investors to INTC stock.
The Alder Lake chips will be a positive catalyst for Intel as they start shipping. The chips will give customers plenty of performance increases across a range of workloads, including gaming, artificial intelligence acceleration, and content creation.
Most analysts reiterated their “buy” rating on the stock following its earnings report. Still, analysts who rate the stock a “sell” set a price target of $40 to $45 on the shares. Value investors can open bullish positions in the beat-up technology giant at those levels.
Fair Value and the Bottom Line on INTC Stock
This 5-year discounted cash flow revenue exit model utilizes a conservative terminal revenue multiple of five times.
| Fiscal Years Ending | 20-Dec | 21-Dec | 22-Dec | 23-Dec | 24-Dec | 25-Dec |
| Revenue | 77,867 | 73,487 | 74,957 | 77,206 | 80,294 | 84,309 |
| % Growth | 8.20% | -5.60% | 2.00% | 3.00% | 4.00% | 5.00% |
| EBITDA | 36,115 | 32,422 | 33,842 | 36,466 | 43,137 | 53,115 |
| % of Revenue | 46.40% | 44.10% | 45.10% | 47.20% | 53.70% | 63.00% |
As shown above, the model factors in negative revenue growth this year and indicates that the firm only has to grow its revenue by at least 2% annually to justify a price target of around $80.
| Metrics | Range | Conclusion |
| Discount Rate | 8.5% – 7.5% | 8.00% |
| Terminal Revenue Multiple | 4.7x – 5.2x | 5.0x |
| Fair Value | $75.43 – $85.98 | $80.61 |
The weakness of INTC stock will probably not last. Value investors should accumulate the shares at their current levels,. The stock trades at a P/E that is a fraction of that of AMD and Nvidia, as the market is underestimating both Intel’s growth potential and the outlook of INTC stock .
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.