There have certainly been plenty of high-flying stocks in the semiconductor industry in recent years. But while smaller, faster-growing companies have gotten much of the attention from investors, Intel Corporation (Nasdaq: INTC) has quietly established a dominant position in the massive cloud data center and server business.
In the past three years, Intel stock is up a relatively modest 55 percent compared to a 325 percent gain by Advanced Micro Devices (AMD) and a 976 percent gain by Nvidia Corp. (NVDA). However, Bank of America analyst Vivek Arya says Intel stock offers investors a compelling value and a prime positioning in the high-growth cloud computing business.
“The company has exhibited solid long-term growth in data center/servers, where it has a 90 percent-plus market share and which are being driven by emerging consumer cloud applications and incremental opportunities in mobile, memory, and the internet of things,” Arya says.
Arya says cloud capital expenditures will increase by 30 percent in 2018, and Intel will also be a major beneficiary from the expansion of wireless 5G networks.
Despite its favorable positioning, Intel faces its fair share of challenges. AMD, Nvidia and other companies are battling for Intel’s precious market share. In addition, Intel’s legacy PC business has been in secular decline for years. Fortunately, Arya says Intel’s data-focused business is growing at a double-digit annual pace and will eclipse the company’s PC-driven sales by 2019.
In the meantime, Arya says Intel is on strong financial footing and the stock provides an attractive valuation, especially when compared to its market-leading peers. Bank of America is expecting Intel to grow free cash flow by 30 percent in 2018 and maintain an annual growth rate of 15 percent in the long-term. Intel currently trades at a forward price-to-earnings ratio of only about 14. AMD stock has a forward P/E of 23, and Nvidia has a forward P/E of 33.3.
Finally, Arya says Intel remains “grossly underweighted” among active fund managers, leaving plenty of room for buying ahead. According to Bank of America’s latest Equity Strategy data, only 27.7 percent of active fund managers currently own Intel stock.
Looking ahead, Arya says Intel has plenty of cloud growth potential and earnings upside.
“Longer-term we see EPS power ~ $4.50 as INTC leverages investments in 5G, AI, and autonomous cars,” he says.
Bank of America has a “buy” rating and $61 price target for INTC stock.