Intel Corporation (NASDAQ:INTC) is in a transition stage and is looking ahead to penetrate in the new markets, which is a critical to drive EPS leverage, says a report from analysts from RBC Capital Markets dated July 13, 2014 by analysts Freedman, Earl Hege and Jeriel Ong. Analysts noted that the shares are expensive on the basis of free cash flow, and are trading 15x 2015 FCF estimate.

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Pressure on margins for Intel

There are some doubts over the potential gross margin in the second half of the year owing to a number of factors like visibility into start- ups costs in late fourth quarter or early first quarter, risk of mobile upgrade, sluggish DCG growth, continued spending in the newer ventures like SoC, mobile and data center. Also, the Return on Investment (ROI) and Earnings per share will be a challenge for the company in the coming 6-9 months.

The analysts think that Intel is not making a wise decision by spending too much in the new mobile initiatives, which are going to be a “drag on operating margins in the years to come.”

They, also, feel that probably Intel should try to adapt ARM core as its leading edge process does not have ARM ecosystem in terms of I/O IP needed for SoC development. Also, the ROI of the internal strategy to develop the mobile and use low-cost debt to acquire an existing and successful player in the market is doubtful.

Balanced risk reward

For the tablet market, Intel is once again residing to its old strategy of entering the new markets with subsidies that counterbalance the less attractive solutions, which according to the analysts is not intelligent as ROI has not been supported by the opportunity.

The analysts analyzed the risk-reward balance saying that too much spending and softer trends in the PC market have driven them to take a conservative view on the shares. Analysts expect the chip maker to post an EPS of -$2.20-2.30 in 2014 on the back of benefits from the upgrade of Windows Operating system in the next three to four-quarters. Dividend yield of 3% is offering positive support to the valuation, but analysts are expecting Intel to perform in-line with the semiconductor industry and global GDP growth rates.

RBC Capital Markets have Sector Perform rating on Intel with a price target of $31.