The wide-moat chipmaker raised its third-quarter outlook based on improving PC market.
By Abhinav Davuluri | 09-16-16 | 11:00 AM | Email Article

Benefiting from a replenishment of PC supply chain inventory,  Intel  increased its expectations for its upcoming third-quarter results. Specifically, revenue is projected to be at a midpoint of $15.6 billion versus the prior figure of $14.9 billion. We believe this positive surprise is strictly transient, as consumers and enterprises alike continue to extend the life cycle of their PCs while increasingly using smartphones in lieu of PCs for their computing needs. Based on this news, we surmise that original-equipment manufacturers have more confidence in upcoming holiday-related PC demand. The shares have tracked higher after the press release. However, we are more interested in the progress made by the data center group, which the firm will discuss during its third-quarter conference call on Oct. 18. Our $31 fair value estimate and wide moat rating are intact, and we recommend prospective investors seek a more attractive margin of safety before committing capital.

Abhinav Davuluri is an equity analyst for Morningstar.

Intel also expects gross margins to be up to 62%, 200 basis points higher than previously projected due to higher PC unit volume. Additionally, operating expenses are expected to be about $100 million higher, which we believe is likely on the research and development side to support of future server products. Based on this revised guidance, we now believe full-year revenue will be up 5.5%, up from our prior projection of 4%. While positive news from the embattled PC space does provide a solid short-term boost to the company’s financials, we continue to believe the most favorable opportunity for the firm remains in the data center. In particular, the persistent growth in data creation, storage, and manipulation will require more servers, with effectively all run on Intel’s CPUs. Furthermore, we still expect PC units to decline in the low single digits annually through 2020, meaning top-line growth will be driven by non-PC segments.

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Abhinav Davuluri does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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