Intel (INTC) – Running Hot?

by Dan September 29, 2017 5:01 pm • Trade Ideas

Back in mid-March when Intel (INTC) was trading a little below $35 I detailed a bullish case for the stock in the back half of the year as the company further integrates a couple of large acquisitions:

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.

As the stock made some progress into the summer I updated this view rolling the bullish positioning out to December expiration and up to the 38 strike from 36 (while also being long the stock), highlighting:

While the stock in the mid to high $40s might seem a tad aggressive if you were to apply a below-market multiple of about 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%.

At this point, I think it makes sense to target the company’s Q3 earnings report expected on October 26th after the close. A beat and raise and the stock finally breaks out to new multi-year highs:


In fact a breakout above the Jan 52 week high of $38.45 would place the stock at the highest levels since 2001!


Options prices appear dollar cheap. With the stock at $38.05, the Oct 27th weekly 38 calls are offered at 85 cents or about 2.2% of the stock price. The fact that they are 5 cents in the money makes the upside breakeven of $38.85 up only 2%!  That is a pretty decent risk-reward and an attractive long stock replacement at long-term technical resistance in front of an event with an uncertain outcome.