Should I Buy Intel Stock After the INTC Q2 Earnings?

Many investors are asking, "Should I buy Intel stock?" after a Q2 earnings beat Wednesday that ran against a sea of concerns about the world's largest chipmaker.

Intel Corp. (Nasdaq: INTC) reported earnings of $0.55 a share versus expectations for $0.50 a share. Revenue was $13.2 billion, beating the forecast for sales of $13.02 billion.

INTC stockInvestors liked the news, sending Intel stock up as much as 8% in after-hours trading Wednesday. But an overlooked item in the earnings report changed all that. The Intel stock price was flat through most of Thursday's trading.

That's because the strong EPS number depended on an abnormally low effective tax rate of 9.3%. A more typical tax rate would have dropped the earnings per share to $0.43 - a big earnings miss.

But that shouldn't distract investors from the bigger Intel story - its transition from its historic bread-and-and butter business of PC processors.

As recently as the first quarter of 2014, the PC business was providing 73.6% of the Santa Clara, Calif.-based company's profits. In the just-reported quarter, 70% of Intel's profits came from other divisions, primarily data center, the Internet of Things, and memory chips.

When research firm Gartner reported earlier this month that PC shipments declined 9.5% in Q2 - the worst decline in two years - it was clear that Intel would suffer a hit.

Revenue from Intel's PC division was down 14% in Q2. Only the progress of Intel's transition strategy averted an earnings disaster.

"This is really a pretty good turnaround," Money Morning Defense & Tech Specialist Michael A. Robinson said on "Asia Squawk Box" on CNBC Asia. "And they're looking at improving profit margins in the very next quarter.... They're doing a good job of moving into growth areas."

But is the transition enough to change the narrative on INTC? Should I buy Intel stock now?

After all, INTC stock is still down more than 18% on the year and has suffered six price target reductions and three downgrades at the hands of analysts in just the past two months.

Let's see what the Money Morning crystal ball has to say...

How to Answer the Question: "Should I Buy Intel Stock?"

The drag from slumping PC sales is only part of what hurt Intel stock. The company also let the mobile revolution - the consumer move to tablets and smartphones that undermined PC sales -- pass it by.

Intel's belated attempt to establish itself in mobile with its "Atom" platform has come at a cost. To gain market share, Intel essentially gave its mobile chips away, a strategy that cost the company more than $4 billion in 2014.

But it has given Intel a foothold in the mobile market. And this year the company is starting to wind back the subsidies, with a goal of reducing them by $800 million in 2015.

The gradual shift of the mobile business from money-loser to money-maker will contribute to Intel's profitability, although it will take several years. But at least in the short term the losses will shrink.

On the other side, we have Intel's success at moving into the markets where computing is growing - data centers and the Internet of Things.

The data center business grew 10% year over year. Intel says it is on track to grow 15% for 2015. The data center unit is now Intel's top profit-generating unit, responsible for 64% of the company's profits.

This business will get another boost from the April acquisition of chipmaker Altera Corp. (Nasdaq: ALTR).

Intel Will Tap Multiple Sources of Growth

You see, Altera is a leader in Field Programmable Gate Array (FPGA) technology. FPGAs make chips customizable for specific tasks, making them faster and more energy efficient. Both attributes are priorities in data centers.

The Internet of Things Group, while contributing just 5% of Intel's profits, did grow 4% year over year and offers a lot of potential as this market develops.

Research firm IDC forecast last month that the global Internet of Things market will grow from $655.8 billion to $1.7 trillion in 2020.

The NAND memory segment was another bright spot in Q2, with revenue growing by 40% from the same quarter last year. Along with the data center and Internet of Things businesses, the memory business will help drive growth.

Meanwhile, the PC business won't stay in a nosedive. The release of Windows 10 at the end of this month will help a little. And according to Statista, the long-term decline in PC sales will level off in 2016 and stay more or less flat after that.

That will stabilize revenue from Intel's PC business even as growth from the other segments continue to beef up the bottom line.

So things look good for Intel stock in the long run, although the rewards for transitioning to new businesses won't be felt for several quarters.

INTC Stock Is Oversold

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"Going forward, I think this is going to be a transition quarter," Robinson said of the current quarter. "I think it still might be weak in the fourth quarter, but I think what we're seeing is that they're really beginning to gain traction... It's just taking a little longer than the new CEO thought it would."

At this point, it's easy to argue that INTC stock is oversold. It's trading just above its 52-week low right now.

The price/earnings ratio is just 12.74, well below the Standard & Poor's 500 average of about 20. Rival chipmakers have higher - and in some cases much higher - P/E ratios.

For example, Qualcomm Inc. (Nasdaq: QCOM) has a P/E of 15.27, and Texas Instruments Inc. (Nasdaq: TXN) has a P/E of 17.72. But Broadcom Corp. (Nasdaq: BRCM) has a P/E of 46.74, and ARM Holdings Plc. (Nasdaq: ARMH) has a P/E of 51.35.

Putting a P/E of 15 on INTC gets you to a price of about $35 a share - a 17% gain from Thursday's closing price of $29.90.

So if you're wondering, "Should I buy Intel stock?" - the answer is yes if you're a long-term investor. INTC has a solid strategy that will push the stock higher over the next 12 to 24 months.

And while you wait, you can enjoy Intel's nice yield of 3.3%.

The Bottom Line: Investors are asking, "Should I buy Intel stock?" after the Q2 earnings beat. And while the company still faces some headwinds, it has laid a foundation for the future. Intel stock has little downside left, but when its turnaround strategy pays off - over the next year or two -- INTC will rise.

Follow me on Twitter @DavidGZeiler.

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