Data Center Propels Intel to Record Results

Intel INTC reported fourth-quarter results significantly ahead of its guidance, driven by broad-based outperformance in the firm’s data-centric segments. For the quarter, data center, "Internet of Things", and Mobileye revenue all achieved double-digit growth. We continue to expect competitive headwinds to impact Intel’s server and PC CPU strongholds over the next few quarters, as AMD continues its onslaught on Intel’s hegemony with numerous product launches on TSMC’s 7-nanometer process technology. However, we believe Intel has been ably navigating the headwinds, via concerted efforts to rein in non-essential spending while investing in critical process and design technologies (10- and 7-nm, 5G, Artificial Intelligence, and automotive). We are raising our fair value estimate for wide-moat Intel to $70 per share from $65, as we incorporate the stronger near-term performance and outlook. Shares were up during after-hours trading and look fairly valued at current levels.

Intel’s fourth-quarter revenue was $20.2 billion, which was up 8% year over year and nearly $1 billion above guidance. Client computing group, or CCG, sales rose 2% mostly due to 4G modem sales for Apple’s latest iPhones. With Intel selling its 5G modem business to Apple and the latter reconciling with Qualcomm, we expect the modem portion of CCG to decline considerably in 2020 for Intel as Apple introduces 5G iPhones. Desktop ASPs fell 4% year over year, which we attribute to competition from AMD. Data center group, or DCG, sales grew 19% year over year, led by strong cloud demand that grew 48%. Gross margins were effectively flat relative to the prior quarter at 58.8%, as a more favorable mix led by DCG offset 10-nm costs. For 2019, total sales grew 2% to nearly $72 billion, as flat CCG revenue was offset by modest growth in DCG and double-digit growth in IoT and Mobileye. Management expects 2020 sales to also be up 2% at $73.5 billion, with first-quarter revenue at $19 billion (up 18% year over year).

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