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Update Intel (INTC)

posted on July 14, 2010 at 9:31 am
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Sales of server chips were up 170% in the second quarter of 2010 from the second quarter of 2009, Intel (INTC) announced last night (July 13) when the company reported earnings.

When I last updated this stock back in April after the company announced first quarter earnings and an increase in gross margins to 63.4%  I wrote “The company had been projecting gross margins of 58% to 64%. The increase in gross margins is the key piece of news in this report. To get margins up to that level the product mix at Intel has had to shift toward a higher proportion of sales from more profitable server chips. Industry watchers have recently forecast a two-year cycle of big increases in server purchases as corporate customers upgrade their equipment. Intel seems to be signaling that it’s going to ride that trend to higher margins for more than just the next quarter.”

Exactly, Intel said in reporting second quarter numbers. Gross margins climbed to 67%. That drove earnings to 51 cents a share on revenue of $10.8 billion. Wall Street had been expecting just 43 cents a share on revenue of $10.25 billion.

And Intel has no intention of letting up on competitors. The company said it will invest an additional $400 million to accelerate the transition to its next generation of processors.

Lots of other parts of Intel’s business did well this quarter. Sales of its Atom chips processors for netbooks, a segment that had raised concern in the first quarter, climbed 16%, for example.

But the long-term story is that Intel with its server chips is successfully riding the transition from a PC-based world to one that puts more and more of global computing power on the Internet.

I’m going to raise my target of $30.40 by December 2010 very modestly to $31. I think that will still leave Intel undervalued for the long run, but I’m just not sure what multiples this very nervous stock market is willing to award even to a great long-term story such as this one.

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  • javos on 14 July 2010

    Clearly a strong report. Corporations buy and upgrade servers with only the bottom line in mind…increased productivity, and therein lies the seemingly never-ending story of technology.

    The dark side of the technology story, and the concomitant story of ever-increasing productivity is the steady decline of employment. Everyday and everywhere, companies are looking to cut costs, one of the largest being labor. Will a laid-off GM worker buy a new Chevrolet?

  • yx on 14 July 2010

    How could the market is down instead of up on this BIG and good news? I thought it would be up another couple of % today. Well, I guess it’s not over until it’s over.

    Agree with javos’ “dark side” analogy. Add more if I may. Some people are calling to “bring back those lost jobs”. I think it’s hopeless to bring back those low skill jobs. Meanwhile America’s education system is increasingly churning out less skilled and less educated population……

  • alexzhu on 14 July 2010

    Server purchase also lags in cycle.

  • mboyle27 on 14 July 2010

    i’m confused. how does Intel appreciate to $31 by year end if we are looking for this rally to eventually die down and the market to move lower.? PLease don’t jump all over me. Although i’ve been following Jim for a while, this is my first post. I’ve been a holder of Intel for many years and have been looking for an exit point. Orig. cost around $25. Thanks.

  • javos on 14 July 2010

    This MAY BE the classic “buy on the rumor, sell on the news”. The stock price may have already anticipated the “news”, and then as new buyers flood in on the actual news, the existing holders of the stock sell into the new buying, repressing the price rise. Just a guess, but does actually happen quite often.

    INTC hasn’t seen the $30-range for about six years, and you could have bought it for $12-ish not very long ago. With a steadily weakening economy, it can certainly go there again.

  • dflippin on 14 July 2010

    yx you are dead wrong,
    The low skill jobs you are so quick to dismiss, lets see what would they be, the manufacture of this HP server I was unboxing which was made in singapore, ohh I know what you were talking about, the software which I am fixing to install,, but that can’t be it since it was built in the Chek Repubic…
    What dam jobs were you talking about!!!!!
    I fight for mine every day against the Chinese Red Army. What the heck do you do.

  • tjkarat on 14 July 2010

    Nice Call Jim. USB no, Cummins and INTC yes.

  • donzelion on 14 July 2010

    For dividend reasons, Intel is moving out of my trading account and into my “long term holding” account at Vanguard. The dividend may not be the largest, but it’s growing, and unlike other tech companies, it’s hard to see a rival cutting into those margins (and even harder to see that happening without advance notice).

    “But the long-term story is that Intel with its server chips is successfully riding the transition…” from US-consumer based growth to global corporate growth. (Cisco is also excelling in this space…pity about their nonexistent dividend.)

  • catengineer on 14 July 2010

    What do u guys think about AMAT? I like the numbers, but I got burned during the last tech bubble and haven’t bought any tech stocks since.

  • SPDTANIA on 14 July 2010

    With INTC and such stocks (MSFT, AMAT, etc.) it is actually quite simple. They crater fast and climb out fast in each recession. That is exactly what happened in the last one. Will it go to 30 – I doubt. No one is going to apply those kind of PE’s that we saw in the earlier tech boom cycles, anymore . So what distinguishes this one from P&G or J&J ? Just that you can easily trade in and out of it and keep a small core holding. It is never going to ZERO for sure. However, NEVER buy on the “news” – I am quite confident that (if I really wanted to add more) it will be down to 20 within the next 2-3 months and of course then it may go up again.
    We should all remember that all the dow and s&p stocks are part of numerous etf’s and when traders run for the exits they drop everything on the way out! The correlations are so high now that even the best of them can get trampled on. That is the time to get in – if you really want to.

  • DanH on 14 July 2010

    Let’s say you were trying to move into a profitable business and take away market share from exisiting competitors. Who would you like to compete with? Intel? I don’t think so. I think Jim is right with this pick. I’m sticking with it as a long-term holding.

  • EdMcGon on 14 July 2010

    5 years ago, you could have said the same thing about the Blackberry and RIMM. Amazing how things change.

    Markets aren’t static. What if someone develops a chip that is 1000 times faster than anything Intel produces? Intel could join the buggy whip manufacturers on the trash heap of history.

    Having said that, in the medium term (over the next few years), Intel certainly looks untouchable. At the same time, I don’t expect to see incremental growth like this last earnings report every quarter. How many more chips can you sell without a major technological breakthrough? Upside is limited, even if the downside is also limited.

  • yx on 14 July 2010

    Read carefully before commenting any particular post.

    You said that I am “dead wrong”. About what? Do you think US is competitive in low skill manufacture jobs? If so, explain me why those jobs left US at first place? How many clothing, shoe and toy companies are still making in US? As you stated, even PC makers have off-shored jobs. Explain me why manufacture jobs left US? You must be thinking US companies which off-shored jobs just simply LOVE Chinese Red Army! If so, how could you PC was made in Singapore and Czech? You must be thinking Singapore and Czech Republic are conspiring with the Chinese Read Army and screwing up US workers.

    Last time I read about these two countries in that regard is that Singapore was in the US-lead multinational military exercise in Bangle bay aiming at China few years ago and Czech is one of the staunchest US allies in central and east Europe.

    Your post is full of contradictions and self-defending arguments.

    Yes, I said that it’s hopeless to try to bring back those low skill jobs to US and yet at the same time low skilled portion of US population seems growing. There are too many people in the world who are willing to work for much less. Trying to bring back low skill jobs is like to compete who can go even lower. It’s hopeless and I stick to my opinion.

    Ignorance and profanity are NOT a good weapon to create jobs or keep jobs or fight Chinese Red Army.

  • ryanpatrik on 14 July 2010

    EdMcGon….thanks for stating the obvious. I suppose with your philosophy nothing is a good investment since everything can become obsolete. Perhaps you might consider, however, that it is Intel’s mission to be the ones that make their own products obsolete. They have successfully done this for quite some time now so I would not bet against them.

    That being said, the poster who said a core position in Intel can be held for the dividend while trading around the sometimes crazy ups and downs in the pe ratio is making a lot of sense. The current pe is certainly not suggesting that this quarter’s growth rate is going to be repeated. The stock is cheap by almost any measure especially when you factor out over $3 per share in net cash sitting there and growing every quarter.

    Barring a market meltdown it is a $26 stock within a short time. The August $22 calls are a great bargain right now. Make sure you take some profits when you get them and remember the stock often goes much further up and much further down than you might expect.

  • amtrend10 on 15 July 2010

    intl and msft…always the bridesmaid never the bride. For trading it’s still google and apple. Long term I like emerson electric…very solid with ample cash, div.

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