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April 19 4:30 p.m. update: The Intel Q1 2016 earnings beat expectations, but the announcement that the company planned to cut 12,000 jobs caused Intel stock to fall 3% in after-hours trading.
Adjusted Q1 earnings per share were $0.50, topping forecasts for $0.48 a share. Revenue was $13.7 billion, slightly missing estimates.
Guidance for Q2 earnings was for revenue of $13.5 billion, lower than the analyst expectation for $14.16 billion.
The layoffs of 12,000 jobs represent 11% of the company's workforce.
But when Intel Corp. (Nasdaq: INTC) reports earnings tomorrow (Tuesday) after market close, investors should seriously consider buying Intel stock.
It's not because we're going to see blockbuster Intel Q1 2016 earnings.
The world's No. 1 chipmaker will likely edge out Wall Street's expectations for earnings of $0.48 a share, an increase of 17% over last year's EPS of $0.41. Revenue for the quarter is forecast to be $13.8 billion, an 8% increase over the same period a year ago.
But for the Intel stock price, the key in the short term is going to be Intel's guidance.
Lowered Guidance Means a Lower Intel Stock Price
Most analysts expect continued weakness in the PC market, one of Intel's major sources of revenue, to lower guidance from what the company was projecting in January when it delivered Q4 results.
You see, Intel's dominance of the PC processor and chipset market is what powered the company's success for so many years. But according to research firm IDC, PC sales have been falling for three years, including 10.6% last year. Ominously for Intel earnings, PC shipments dropped 11.5% in the first quarter of 2016.
Intel bears also bemoan the company's inability to make much headway in the market for mobile chips (smartphones and tablets). Despite the use of subsidies that have cost Intel about $1 billion per quarter over the past few years, its market share in smartphones is just 1%.
The company's struggles in these two areas will no doubt be reflected in the Intel Q1 2016 earnings. And the odds are good that Intel stock will dip even more from the current price of about $31.67 in the days ahead.
But we remain bullish on INTC stock.
"This is a stock you can count on for income and appreciation for years to come," said Money Morning Defense & Tech Specialist Michael A. Robinson.
Here's what the bears are missing…
Why INTC Stock Is a Buy Following Q1 Earnings
While the bears are right that the declining PC market and a poor mobile strategy have hurt Intel, that's not the whole story.
That Intel's earnings have been more or less flat since 2010 despite the slumping PC market tells you that the company has been compensating with growth in other areas.
Primarily that growth is coming from its server business. Like it did with the PC business, Intel dominates the market for server chips. It owns a whopping 98% of that market.
The data center business has doubled revenue since 2010, and now makes up nearly a third of Intel's total sales.
And while PC revenue is about twice that of the data center revenue, the profits for both are nearly equal. So as the shift continues, Intel's profits will grow.
Intel has also invested heavily in chip technologies targeted at the future of computing, such as the Internet of Things. The IoT business represents about 4% of Intel's business now, but the growth rate is in the high single digits.
Another source of growth is NAND memory, currently 8% of Intel's business. Last July Intel unveiled its 3D XPoint technology, a new class of memory 1,000 times faster the memory used in today's smartphones.
The growth from these segments will become a lot more obvious as the PC market stabilizes. IDC forecasts that 2019 PC shipments will be just 0.4% below last year's, which means most of the bleeding is over.
Intel is also winding down the contra revenue program in its mobile segment. While Intel doesn't figure to make a mark in mobile at this point, cutting those losses will also help the company's bottom line.
Where the Intel Stock Price Goes from Here
For investors, the setup couldn't be more ideal. If this week's Intel Q1 2016 earnings do drop the INTC stock price a little, so much the better.
Intel's estimated earnings for 2017 is $2.63, which at the current price/earnings ratio of 13.5 gives us a price of $35.50, a modest 10% gain before you toss in the plump 3.3% dividend.
But Intel is a stock you want to hang onto for the long haul. As the growth in the data center, memory, and IoT businesses accelerates, so will Intel's earnings per share.
Intel could easily hit an EPS of $3.00 by 2018 and $4.00 by 2020. Assuming a steady 13.5 P/E, that puts our projected INTC stock price at $40.50 by 2018 (a gain of 28% plus dividends) and $54 by 2020 (a gain of 70% plus dividends).
Miracle Memory: Intel's 3D XPoint memory is the first new type of computer memory in 25 years. It's that special. Developed in cooperation with Micron Technology Inc., 3D XPoint has unique characteristics that will make it perfect for a new generation of computing devices. Here's why 3D XPoint memory will open the floodgates of innovation – and fatten Intel's bottom line…