Intel Undervalued and Compelling

Intel INTC reported second-quarter results ahead of our expectations thanks to stronger client computing group, or CCG, sales. Specifically, ASP strength, solid commercial PC demand, as well as pull-ins ahead of possible tariff impacts drove the outperformance. We continue to anticipate a highly competitive environment over the next few quarters as AMD ramps its latest Ryzen 3 desktop and EPYC 2 server processors. Positively, Intel is shipping 10-nanometer Ice Lake chips for laptops to be sold later this year, with 10-nm server parts ramping in 2020. Management increased the full-year revenue guidance by $500 million to $69.5 billion, due to the stronger second-quarter, while forecasting a recovery in cloud spending in the second half of 2019. Shares rose about 5% during after-hours trading, and we are maintaining our $65 fair value estimate for wide-moat Intel. We reiterate our view that Intel offers one of the most compelling investment opportunities in the semiconductor space.

Intel also announced it agreed to sell its 5G smartphone modem business to Apple for $1 billion. We had been expecting such a deal since Intel announced its plans to exit the 5G modem business following the resolution of the dispute between Apple and Qualcomm earlier this year. Worth noting is the deal doesn’t impact Intel’s 4G modem business, while Intel also retains the option to develop modems for non-smartphone applications such as autonomous vehicles. We believe this is a best-case scenario for Intel, and we applaud the firm’s efforts to refocus on its core CCG and data center businesses against AMD and AI and automotive opportunities versus Nvidia. For Apple, this deal validates the firm’s strategy of trying to bring as much chip development in-house as feasible, though we don’t expect the firm to replace Qualcomm’s 5G modems in future iPhones for at least a few years. We are maintaining our $200 fair value estimate for narrow moat Apple and see shares as fairly valued.

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