No change to our $31 fair value estimate after fourth-quarter results exceed our expectations.
By Abhinav Davuluri | 01-26-17 | 09:25 AM | Email Article

 Intel  reported fourth-quarter results that exceeded our expectations. The firm’s client computing group, or CCG, boasted an impressive rebound from 2015, thanks to Intel winning a portion of Apple’s iPhone 7 modem business. Amid a secular decline in PC sales, Intel has actively tailored its product offerings to focus on the enthusiast market for high-end applications such as gaming. In contrast, the data center group, or DCG, ended a second consecutive year with decelerating growth due to weak enterprise spending. While public cloud spending has grown at stellar rates, we note this portion of Intel’s data center business remains smaller than enterprise, though this dynamic is quickly shifting. Our investment thesis for wide-moat Intel continues to revolve around data center growth offsetting PC declines, with tangential endeavors such as Internet of Things and nonvolatile memory not moving the needle just yet. With management forecasting 2017 revenue to be flat, we are maintaining our $31 fair value estimate and recommend prospective investors seek a more attractive entry point.

Abhinav Davuluri is an equity analyst for Morningstar.

Fourth-quarter sales were $16.37 billion, up 10% year over year, led by the DCG which was up 8%. Robust cloud and communication service provider, or CSP, growth of 30% each offset softness from enterprise spending, which declined 7%, leading to record quarterly DCG sales of $4.67 billion. Although PC processor units were down 7%, we were pleased to see a rich product mix with average selling prices up 7%. Gross margins fell 260 basis points to 61.7% from the prior year period primarily due to higher factory startup costs for the upcoming 10-nanometer process. Notably, operating margins for CCG rose 750 basis points to 38.6%, as Intel benefited from lower platform costs for its mature 14-nm process (that just completed its third year in operation) and has pared back its spending for both PC and mobile products.

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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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