Choppy Outlook for Undervalued Intel

Intel INTC reported first-quarter results that were in line with expectations, while reducing its 2019 guidance $2.5 billion to $69 billion (which implies a 3% year-over-year decline). In hindsight, Intel’s prior guidance appears to be somewhat overambitious as it incorporated a substantial uplift in the second half, particularly from the data center group. Given the swath of challenges facing the semiconductor market (including but not limited to: PC CPU supply constraints, inventory builds in smartphones and GPUs, cloud inventory digestion, weaker China chip demand, and a tepid memory market), much of the recent recovery in semiconductor stocks seems premature, especially given the second-half recovery is not a foregone conclusion, in our view. We remain positive on major industry trends such as 5G, AI, greater semi content in automotive, shift to the cloud, and the broader "Internet of Things." Wide-moat Intel remains well positioned to capitalize on many of these burgeoning tailwinds with unmatched breadth in its product portfolio. Although some share gains are likely by rival AMD as it ramps up new offerings, Intel’s 10-nanometer products are on track for hitting shelves during the second half of 2019 with certain mobile Ice Lake variants to be qualified during the current quarter. Shares tracked lower by 7% during after-hours trading, but we think investors with a long-term horizon will find current levels compelling relative to our unchanged fair value estimate of $65 per share.

First-quarter revenue was $16.1 billion, flat year over year. Client computing group sales rose 4% thanks to a richer product mix led by gaming, as notebook and desktop ASPs rose 13% and 7%, respectively. We note the capacity constraints faced by Intel for PC chips (stemming from stronger-than-expected demand and Intel’s delayed 10-nm ramp) contributed to PC volumes being down 7% year over year.

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