Intel (INTC) – How’s My Driving?

by Dan June 7, 2017 3:29 pm • Trade Ideas

I just got done writing about Tesla’s (TSLA) eye-popping 65% year to date gains, and its 100% gains from its post-election 52-week lows made in mid-November (read here). As investors and pundits debate whether TSLA is car maker or a tech stock, that debate is happening in reverse for others, as tech companies adjust to a future of self-driving cars and the new found time behind the wheel former drivers of cars will have once they hand over the controls to Skynet. Transportation as a Service, one that is not reliant on human drivers is shaping up to be the next massive tech battleground as Alphabet, Apple, Intel, Samsung, Baidu, Uber, Lyft, TSLA and a growing list of tech and industrial behemoths push aggressively through r&d and m&a to carve out their piece of the newfound transportation utopia. Intel’s CEO recently had some fairly bold predictions about the scope of the self-driving ecosystem in the decades to come:

INTC has gone to great lengths, to diversify away from their reliance on PCs and mobile devices in the last couple years through m&a in a push into emerging technologies, from my March 14th post soon after they announced their intent to pay $15 billion for MobileEye (MBLY), the chip-based camera systems maker for autonomous cars:

INTC was at the forefront of the personal computing and internet revolutions in the 1980s and 1990s, but for all intents and purposes missed the mobile boom of the 2000s. They seem hell-bent not to miss what comes next.  Before the MBLY deal, INTC paid nearly $17 billion for Altera in 2015 to diversify away from the PC market and create a footing in emerging technologies broadly described as the Internet of things (IoT). Then last summer INTC paid $400 million for Artificial Intelligence chipmaker Nervana, at the time, Intel vice president Jason Waxman telling Recode:

the shift to artificial intelligence could dwarf the move to cloud computing. Machine learning, he said, is needed as we move from a world in which people control a couple of devices that connect to the Internet to one in which billions of devices are connecting and talking to one another.

There is far more data being given off by these machines than people can possibly sift through

Put those three deals together, equaling more than $32 billion in cash, about 20% of their current market cap and 50% of their expected sales this year, and you get the clear sense that this is not founder Gordon Moore’s Intel anymore. BUT current management is clearly well aware that applying Moore’s Law to the emerging technologies they are so aggressively investing in could yield returns at a sort of exponential rate. What investors in the near term will have to grapple with is just how much they are overpaying for MobilEye, and now much they might have overpaid for Altera. That said if Nervana’s technology were to be able to augment or be embedded with that of Altera and or MobileEye than it might end up justifying the purchase price of the others.

The year to date under-performance of INTC vs the Philadelphia Semiconductor Index, or the SOX as it is known is starting (flat vs up 23%). Investors clearly appear to be grappling with the aggressive m&a strategy, as I suggested in March. But WOW, in a market where almost every mega-cap stock is levitating near 52 week or all time highs, where investors seem less discerning on valuation in lieu of growth, INTC seems too darn cheap (trades 13x, with a dividend yield of 3%), when you consider the potential that the company is in the midst of a massive transformation.

To my eye, not much has changed since I last looked at the name in March, the stock precariously holds the uptrend that has been in place since its early 2016 lows, and a break below on news would likely have the stock re-testing its July breakout level near $30, down about 10%:


That said, a breakout above the downtrend that has been in place since its 52-week highs made in October could yield a fairly epic move with little overhead resistance with room to run to its Sept 2000 gap near $50:


While the stock in the mid to high $40s might seem a tad aggressive if you were to apply a below-market multiple of 16x to INTC’s expected 2017 eps of $2.85 you have a stock at $45.60, and 16x expected 2018 eps of $2.97 the stock could be at $47.50, which might be a conservative assumption if the company were able to see better than expected growth and possible cost-cutting synergies with Altera and MobileEye. So you might have a scenario where investors start to price in higher than mid-single digit eps growth and rerate the stock has they have done for Texas Instruments (TXN) that trades 21x expected 2017 eps growth of 12% and Xilinx (XLNX) which trades nearly 26x expected 2017 eps growth of 13%.

Back in March we detailed the following trade idea in INTC:

After the stock made a move higher towards 36 we adjusted, closing the April call and rolling it to an October vertical:

The October position is worth about 1.40 here and is in pretty good shape should the stock. For those looking at the stock with fresh eyes, another calendar at a higher strike makes sense.


INTC (36.30) Buy the July/Dec 38 call calendar for .90
  • Sell 1 July 38 call at .20
  • Buy 1 Dec 38 call for 1.10


Breakeven on July and Dec expirations: This trade does best into July expiration if the stock is around 38. If that’s the case the July calls can be rolled out to either continue the calendar or to turn the Dec calls into a vertical. Risk is if the stock goes lower from here but with the majority of its value in December it’s unlikely to be worthless any time soon, even if the stock goes lower. The most that can be lost under any scenario is .90.

Rationale – July expiration falls just before earnings, so the July call sale is a good month to use to finance December. After July expires the trade risk can be lessened with a roll, setting up for earnings on July 27th and the months beyond.