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Why Intel Stock Price is Poised to Double

Companies / Tech Stocks Jun 19, 2013 - 03:13 PM GMT

By: Money_Morning


Michael A. Robinson writes: The world's largest semiconductor firm's stock has become one of high tech's biggest value traps, which isn't a great place to be for stockholders.

But things are changing and tech investors - all investors -- should take heed.

First let's look at what it means to be a value trap.

On the value side, Intel Corp. (Nasdaq: INTC) has been and continues to be one of the world's most respected chip firms. And it has the kind of profit margins most hardware companies can only dream about.

Not only that, but last year it invested more than $10 billion in research and development, an amount that was seven times that of second-place spender Qualcomm Inc. (NasdaqGS: QCOM).

Intel's very existence is a testament to high tech's exponential growth. After all, it was an Intel co-founder who came up with Moore's Law, which basically says computing power doubles about every two years.

This is an outfit with a long list of technical firsts that is leading the charge into nanoscale and 3D semiconductors. The transistor gates inside its new Ivy Bridge chips measure a mere 22nm long. At that size you could fit 4,000 of them across the width of a human hair.

Here's the trap...

The big-cap leader's legacy and technical chops haven't translated into stock profits.

Over the past five years, not counting its 3.9% dividend, the stock has returned a scant 9%, almost exactly half that of the S&P 500.

So, you have a great company that's still a solid industry player that can't seem to get out of its own way when trying to unlock that value.

But this sleeping giant is about to awaken -- and double the value of its stock.

Reawakened Growth

The first thing on Intel's new agenda is to correct one of the worst blunders it ever made.

I'm talking about how it missed the biggest tech shift since the PC revolution of the mid 1980s -- the Mobile Wave.

Right now, smart phones and tablets are outselling Intel's bread-and-butter PCs by a nearly 5-to1 margin. They're set to capture 35% of the world's $1.35 trillion global tech economy

Now you know one of the reasons why former Intel CEO Paul Otellini decided to retire at age 62, three years ahead of the firm's standard age.

In a recent Intel meeting before he left, Otellini said he regretted not jumping into mobile devices. He also indicated that Intel needed some younger blood at the top.

New Blood

Enter Brian Krzanich. The new CEO is 52 but has logged 30 years at Intel. He joined the firm right out of San Jose State where he got his bachelor's in chemistry.

Coming up the operations side, he knows the challenges Intel faces in making a big move into mobile chips.

More to the point, however, he sees the huge shift in the market and is not about to leave Intel on the sidelines of the mobile revolution.

And he's already made that abundantly clear in his first month.

Just 12 days after assuming his new role, he announced that Intel had acquired the ST-Ericsson unit responsible for creating microchips that allow navigation through GPS satellites. The idea behind the $90 million merger is to embed that tech in smart phone components.

Some Intel watchers have speculated the firm might leverage this move to make its own smart phone.

As a veteran tech investor, I don't believe that's even a remote possibility.

Intel isn't geared up to start selling its own devices.

The last time the company made a foray into selling this kind of stand-alone product, it did not go well.
Making Mobile Waves

Several years ago, the company came up with a forerunner of a Web-centric tablet computer. But it never made it to market, the victim of two main factors.

First was the difficulty of moving quickly in a sprawling chip firm with a $122 billion market cap.

The second was Steve Jobs. As the visionary leader of Apple Inc. (NasdaqGS:AAPL), Jobs figured out the best way to debut a small Web device -- put it inside a smart phone.

With the iPhone eating the market alive, Intel quietly shelved the mobile Web platform.

So, I don't expect Intel try to branch out into a mobile venture. I believe it will stick to its core strength, high-quality semiconductors and sell into the mobile sector.

And a key part of its mobile strategy is to align with Apple's arch-rival Samsung Electronics Co. Ltd. (KRX:005930).

This bold move just gave Intel its biggest mobile win to date. The company will have its Atom line of processor chips inside Samsung's new Galaxy Tab 3.

This is a huge move for the late comer to the party, and Intel is getting lots of buzz in both investing and die-hard tech circles.

Right now, mobile accounts for only 1% of Intel's sales. But the Galaxy gig alone could boost that several fold.

For his part, Krzanich has already said he's looking beyond today's mobile sector. He recently told the New York Times he wants a big slice of the coming era of pervasive computing.

"I look at this world and see all kinds of devices connected to computers, and people connected to it all the time," Krzanich told the paper. He added that, "If you're just talking phones, you're shooting behind the duck."

Given that statement, recent news that the firm's investment arm is backing several types of cutting-edge tech with a $100 million fund makes perfect sense.

Shooting In Front of the Duck

Intel calls this new segment "perceptual computing," something I first wrote about for Money Morning back in February. Over the next three years, Intel says it will invest in firms making software and applications in areas like imaging, gesture and voice control, emotion sensing and biometrics.

Clearly, Krzanich thinks big. And investors are regaining confidence in the storied firm.

Intel is up more than 12% in the last three months. From here, the stock could double in five years.

The math is simple. Selling more mobile chips as well as those used in data centers needed for wireless computing could boost earnings by 60% from this year's projected profits of about $2.05 a share.

That kind of earnings growth could easily push the PE from the current 12.3 to 15, roughly in line with the overall market.

Those factors add up to a potential upside of $49.20 a share compared with the current $24.65. That's a fair price for a firm that has an operating margin of 25% and generates $6 billion a year in free cash flow.

So, tech investors looking for a total return that includes a solid dividend and respectable growth would do well to take their cue from the company's new marketing slogan.

Take a "look inside" the New Intel...

Source :

Money Morning/The Money Map Report

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