Headwinds Persist for Intel, but Sell-Off Overdone

Abhinav Davuluri: Intel reported fourth-quarter results that fell modestly below our expectations, mostly due to a $200 million shortfall in modem demand from Apple for iPhones, as well as softer demand in China, a digestion period in the cloud, and tepid memory pricing. While these near-term headwinds will likely persist for a few quarters, we believe the 7% sell-off in Intel shares following the report 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, and we expect mid-single-digit growth in 2020 and thereafter. With Intel's 10-nanometer PC processors on track to be in systems on shelves for holiday 2019 and the firm's data-centric growth engine firing on all cylinders (with Mobileye sales up 43% and Altera Data Center revenue up 50% during the fourth quarter), we see an attractive margin of safety in this wide-moat chip titan relative to our unchanged $65 fair value estimate.