HPQ - Intel: Upgrading To Buy - More Near-Term Upside Ahead

2023-09-07 10:00:00 ET

Summary

• We are upgrading Intel to a buy from a hold. We expect more near-term upside for the stock due to low expectations coupled with PC client demand recovery.
• Additionally, we expect share loss to Advanced Micro Devices to moderate significantly.
• We think institutional investors are comfortable with a higher stock multiple as INTC is now showing better process roadmap execution.
• We still expect its data center business to remain mixed in the near-term due to A.I. capex spending cannibalization on compute servers.
• Still, we think the expectation is low enough for INTC to outperform expectations.

We're upgrading Intel ( INTC ) to a buy from hold. We see more near-term upside heading into 2024 due to lower expectations and PC Client demand recovery. We continue to see our investment thesis regarding A.I. server capex cannibalizing compute server volumes negatively impacting INTC's data center business playing out. But now, we think the timeline will be stretched out, and expectations are low enough for INTC to outperform. Management guided for the high-end range for next quarter, 3Q23, noting on the Deutsche Bank's 2023 Technology Conference call , " We say we're above the midpoint of our guide for Q3." The lower expectations combined with investor confidence regarding management's execution of the process roadmap and Intel Foundry Services' agreement with Tower Semiconductor ( TSEM ) will drive investor confidence in the stock.

INTC is up 37% YTD, outperforming the S&P 500 by around 20%. The stock is up 41% over the past six months due to increased management and investor confidence in INTC's position in its five nodes in the 4-year process roadmap and signs of recovery in the PC Client demand. We continue to see the PC TAM for 2023 shrinking Y/Y and expect the PC TAM to rebound by slightly 5% Y/Y in 2024; Micron ( MU ) forecasted lower 2023 PC, smartphone, and server TAM, while Seagate ( STX ) cited weaker PC HDD demand and HP Inc. ( HPQ ) earnings reflected current PC weakness. Still, we think lower expectations will allow INTC to outperform with the slow recovery of PC Client demand; this quarter, INTC's Client Computing Group sales grew 18% QoQ but dropped 12% Y/Y to $6.78B, still exceeding expectations. Additionally, we expect INTC's share loss to Advanced Micro Devices ( AMD ) in PC and server markets to continue to moderate at the back end of the year, driving the upside toward 4Q23. We see the stock multiples increasing due to these factors and leading to higher stock prices in the near-term. We recommend investors explore attractive entry points into the stock at current levels.

The following chart outlines our rating history on the stock.

Valuation

INTC is trading above the peer group on a P/E basis C2023 at 59.1x EPS $0.62 compared to the group average of 30.4x. The stock is trading at 3.5x EV/C2023 Sales versus the peer group average at 5.9x. We see attractive entry points into the stock at current levels to ride the near-term upside.

The following chart outlines INTC's valuation against the peer group.

Word on Wall Street

Wall Street is now more bearish on the stock. Of the 43 analysts covering the stock, seven are buy-rated, 30 are hold-rated, and the remaining are sell-rated. The stock is currently priced at $37 per share. The median and mean sell-side price target is $35 with a potential downside of -5-4%.

The following chart outlines INTC's sell-side ratings and price targets.

What to do with the stock

We're upgrading INTC to a buy; we haven't abandoned our original investment thesis regarding the A.I. boom pressuring INTC's data center business. We believe the company has room in the near-term to outperform due to the lower expectations amid macro uncertainty.

For further details see: