Friday, June 27, 2014 2:27:06 AM
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Intel: Bernstein Ups to Hold; Market Didn’t Care About Short Thesis
By Tiernan Ray
Shares of Intel (INTC) are up 13 cents, or 0.4%, at $30.91, after Bernstein Research’s Stacy Rasgon this afternoon raised his rating on the shares to Market Perform from Underperform, and raised his price target to $28 from $22, writing that while his “structural short thesis” on the stock has “played out,” nevertheless “the market didn’t care (the party was thrown but nobody came).”
While Intel still faces challenges, Rasgon admits there are “near-term positive catalysts that could continue to smack a short position” and so, “while it pains us greatly, we are upgrading the stock to Market Perform.”
Rasgon’s argument about Intel was based on a structural change in Intel’s business, with the company shifting focus from its traditional high-priced, high-margin chips for personal computers to cheap chips for smartphones and tablets, and the risk to profit and cash flow.
“However, we got two things wrong,” he acknowledges:
First, the market seems to have accepted the idea of structural headwinds, and we never got the de-rating that we sought; quite the opposite in fact, as multiples have climbed rather than compressed (indeed, the party was thrown, but nobody came). And, of course, near-term PC strength is a definite headwind for the short thesis (we have always said the bear call is not “PCs stink,” and as such are not troubled by stabilization, but it is a fact that a more robust recovery derails the short). And unfortunately, the near-term bear case is now, indeed, “PCs stink,” as we wait to see if recent corporate strength is real, or simply pull-forward on the Windows XP EOL, leading to an air pocket down the road. While we believe this is very plausible at some point, the specific timing is uncertain.
A lousy PC market is not enough to hang a short thesis on, he writes, and there are several potential catalysts ahead for Intel:
Prospect for an overall broader recovery in PCs, as always, exists;
Potential for continued gross margin strength as 14nm rolls in (particularly if one believes Intel’s presentations about forthcoming transistor scaling).
Headline risk on the mobile front (we don’t expect significant revenue, but even newsflow on design wins could help support the multiple);
Another potential Data Center upgrade cycle with the advent of Grantley; Potential for further announcements on the capital allocation front – the company will shortly exhaust their existing buyback authorization, and could announce another;
Finally, Q3 consensus estimates that appear sub-seasonal (which could indeed be the case after a very strong Q2, but could also be light if the corporate recovery continues, Data Center is strong, and/or at least some mobile revenues start to shine through).
http://blogs.barrons.com/techtraderdaily/2014/06/26/intel-bernstein-ups-to-hold-market-didnt-care-about-short-thesis/
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