Intel: A Buy Despite Headwinds

11/04/2013 8:00 am EST

Focus: STOCKS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Despite industry and company headwinds, investors shouldn't ignore the strengths of this leading semiconductor stock, argues Elliott Gue, editor of Capitalist Times.

Intel Corp. (INTC) posted third-quarter revenue of $13.5 billion—an increase of 5% sequentially and roughly flat, relative to year-ago levels.

Excluding the effects of one-time factors, the company's earnings per share came in at $0.49. These results were in line with Bloomberg consensus estimates.

However, some analysts were disappointed that Intel lowered its fourth-quarter sales guidance to between $13.2 billion and $14.2 billion, which equates to a 2% decline or a 5% increase, relative to the preceding quarter. Management attributed this slight downward revision to soft PC demand.

Bearish commentators cite Intel's limited share of the rapidly growing mobile and tablet markets and the challenges that the firm faces in stealing business away from ARM Holdings (ARMH).

And even if Intel makes inroads into these product categories, critics caution that the lower average sales prices on processors used in these mobile devices may fail to offset volumes cannibalized from the traditional PC market—the source of 62% of the chipmaker's third-quarter revenue.

These headwinds are real. But investors shouldn't overlook the strength of Intel's data center group, which posted record revenue in the third quarter and continues to benefit from the transition to cloud computing.

In the third quarter, the company grew its cloud-related revenue by 40% from year-ago levels and storage sales by 20%, while revenue in its high-performance computing segment jumped by 27%.

Meanwhile, management indicated that Intel's data center group would continue its strong sales momentum in the fourth quarter and reiterated its full-year guidance for double-digit revenue growth in this segment.

We also expect the company to benefit from improving enterprise demand in the US and Western Europe as economic growth strengthens in these regions. That being said, demand in emerging markets should remain volatile in the near term.

With Intel making inroads into the tablet and smartphone markets, and its data center solutions likely to continue their impressive momentum, the stock continues to rate a buy up to $27.00 per share. A dividend yield of 3.7% is an added bonus.

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