Intel Sell-Off Overdone, Shares Cheap

Intel INTC reported fourth-quarter results that fell modestly below our expectations, mostly due to a $200 million shortfall in modem demand from Apple, as well as softer demand in China, a digestion period in the cloud, and a tepid NAND environment. While these near-term headwinds will likely persist for a few quarters, we believe the 7% sell-off in Intel shares during after-hours trading was overdone. Management projected 2019 revenue will still grow, albeit only slightly. Nevertheless, given the macroeconomic weakness, U.S.-China tensions, and competitive pressures from AMD, we view this forecast as reasonable. With Intel’s 10-nanometer Ice Lake PC processors on track to be in OEM systems on shelves for holiday 2019 and the firm’s data-centric growth engine firing on all cylinders, we see an attractive margin of safety in this wide-moat chip titan relative to our unchanged $65 fair value estimate.

Fourth-quarter sales grew 9% year over year to $18.7 billion, thanks to growth across nearly every business segment with the exception of the Internet of Things group. PC-centric revenue rose 10% as notebook and desktop ASPs rose 6% and 13%, respectively, thanks to a richer product mix skewed to the likes of gaming. Following three-straight quarters of over 20% year-over-year growth, data center group sales grew only 9% for the quarter, due to softer China demand and cloud deceleration. Within DCG, 24% cloud segment growth and 12% communications service provider growth was partially offset by a 5% decline in enterprise sales. Positively, Xeon average selling prices were up 5% year over year, as cloud and enterprise customers alike move up the stack due to more compelling features.

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