Intel is set to hold its next analyst day on Thursday, and management is expected to provide updated guidance at that time. They are also expected to condense all the information and provide more details on their high-level strategies rather than full details from the bottom up. Further, Wall Street will be watching closely to see what management says about capital expenditures for next year.
What Wall Street expects from Intel
Credit Suisse analyst John Pitzer and his team report that Wall Street is expecting Intel to grow its revenue by 3.9% for the 2016 calendar year. They expect management to guide for revenue to be flat to up 5% year over year in 2016. They’re expecting a gross margin guide to be flat at 62%, plus or minus 200 basis points, while the consensus estimate is at 62.3%.
They predict that Intel will increase its operating expenditures half as fast as its revenue with a 26.4% operating margin, compared to the consensus of 25.6%. Pitzer and team expect capital expenditures to be between $9 billion and $10 billion, while Wall Street in general would prefer less than $10 billion and worry about anything over $10 billion.
Macquarie Research analysts Deepon Nag and Matthew Prisco notes that Intel announced that it will invest $5.5 billion in building its own international NAND manufacturing facilities, which they say increases the risk that the guide for capital expenditures will be higher than expected. They peg Wall Street’s highest tolerance level a little higher than Credit Suisse at $11 billion because at that level, the chip maker’s EV to free cash flow multiple would be in line with its three-year average. As a result, anything higher than that, could place pressure on Intel shares, they said.
Intel by segment
For Intel’s Client Computing Group, they predict it to be flat to down, which would put it in line with Wall Street’s expectations. The Credit Suisse team believes the Data Center Group will see growth in the low to mid-teens, which would put it slightly under to in line with expectations, with a long term target of 15%.
They expect Intel to reduce its losses in Mobility to about $300 million, plus or minus, compared to 2015’s $800 million in losses. And for the Non-Volatile Memory Group and the Internet of Things Group, they project growth in the mid to high teams with capital expenditures of about $1 billion for Dalian.
Pitzer adds that the headline guide would result in earnings of $2.30 per share, plus or minus eight cents, compared to the consensus estimate of $2.35 per share in the 2016 calendar year. He things that in the long term, Intel could reach $4 per share in earnings by leveraging the core PC IP into the Data Center Group, Internet of Things, and Non-Volatile Memory. He maintains his Outperform rating and $40 per share price target on Intel going into this week’s analyst day.
Why Intel may be at an inflection point
Pacific Crest analysts Michael McConnell and Hans Chung are also in the bull camp on Intel, and they have maintained their Overweight rating and $37 per share price target on the stock. They point out that the chip maker’s sell-in compared to PC supply chain sell-out during the third quarter is at its lowest level since the first quarter of 2009.
They also note that demand forecasts at manufacturers of motherboards and notebook computers have climbed over the last few months and that the data center server market is showing signs of secular growth. Further, they see optionality in the future reduction in losses in Intel’s Mobility division.
Although the Macquarie team has a Neutral rating on Intel, they do report that their checks indicate Intel has captured some of Apple’s orders for thin modems for the iPhone 6S. They estimate those orders at about 4 cents per share in earnings and $650 million in revenues for 2016. For this reason, they believe Intel will guide for LTE revenues to grow.
Shares of Intel were hovering at around their opening price of $32.11 per share as of this writing.