Intel, Value Inside?

As the sell-off in the tech space continues and investors eschew the well-hyped names like Facebook and Tesla in favor of quality and conservatism, there is one stock well placed among its peers, i.e. IBM and Microsoft, which is poised to capture investors’ collective attention. That stock is Intel, which one should definitely consider as part of the rotation to quality and the stock upon which we will focus today.

Earnings Expectations Just Miss Mark

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Yesterday, amid high expectations, U.S. chip maker Intel released its earnings results for the first quarter of 2014. Ahead of the earnings release and after Wall Street’s closing bell, share prices edged higher to what would (during regular trading hours) have been a 52-week peak; that helped to fuel investors’ expectations that the report would be a favorable one and that forward guidance, especially for 2014, would see a rise in revenue estimates. The reality, however, is that Intel’s Q1 financials didn’t precisely meet expectations but still despite the mixed outcome, it wasn’t a total disappointment as each negative was mitigated by a positive. On the negative side, revenues slightly missed the mark, surprising some given the surge in PC sales, with actual earnings of $12.764 billion against expectations of $12.81 billion. On the positive side, EPS beat the forecasts by a penny, coming in at $0.38 a share. There were several other positive take-aways in the earnings report; gross margins beat expectations at 59.75%, at $137 million restructuring and other charges were far less than the forecasted $200 million and last but not least, interest and equity investments had a positive impact on the balance sheet of $160 million, well above the $25 million initially estimated.

Intel’s Look Ahead

Looking ahead, Intel provided some forward guidance for the second quarter. Intel management expects revenues to improve slightly to $13 million, though the $500 million leeway could mean that, if realized, revenues would either only marginally surpass Q1 or even come in lower. Gross margins are expected to improve to about 63%, and spending for R&D and MG&A should amount to about $4.8 billion. For the remainder of 2014, Intel’s management doesn’t see revenues improving, and left their outlook, in that respect, unchanged, which could be a disappointment to investors who were expecting to see about 0.8% growth in revenues this year. Intel predicts that the gross margin percentage will edge higher to about 61%, but like the actual results, the company’s forecasts have negatives which tend to mitigate the positives, in this case an increase in spending in R&D and MG&A.

No Reason Not to be Anything but Upbeat

Granted, Intel’s first quarter earnings report wasn’t the greatest, but it wasn’t bad either, and it certainly wasn’t bad enough to warrant a change in investors’ sentiment. Overall, the company’s management is on the right track and improvement in due course is highly likely.

Fundamentals vs Technicals

When it comes to technical vs fundamentals, Intel has quite a number of contradictions. The fundamentals seem ample enough and analysts eye $32 per share, a 19.5% upside, but the technicals are a bit tricky with formidable resistance at $27. How should you play this, then? By following the age old investment adage, “wait for the dip.” If the fundamentals look good, then a buy on the dip is the best strategy. While $27 is the resistance level, $23-24 is a buying zone. A dip through to that level and you may consider a buy on the dip and then hold; let the stock’s fundamentals do the work for you. Waiting for the dip could also prove more lucrative, as the $32 level analysts are eyeing is a 33% upside from $24. But until then, it’s a wait-and-see game, so beware of jumping the gun.