Intel Corporation (NASDAQ:INTC) stock has broken out. For all of 2015 and 2016 (and most of 2017), INTC stock traded in the higher-20s and mid-30s. Now, INTC stock has rallied 15% over the past 3 months to trade just shy of $40.
That is a pretty significant breakout from a nearly 3-year trading range.
What is pushing it higher? General enthusiasm in semiconductor stocks owing to growth potential in artificial intelligence and autonomous driving is finally starting to find its way into Intel stock.
Is this enthusiasm justified? Is there more room to run in INTC stock?
I think so.
Intel Is Now in the Big Growth Discussion
For a long time, chip-maker NVIDIA Corporation (NASDAQ:NVDA) reaped all the rewards of the artificial intelligence uptrend.
That company has carved out a leadership position for itself in the AI market and is now looked at as all-things-AI growth story. That narrative encompasses big growth markets like cloud computing, machine learning, the Internet of Things (IoT) and autonomous driving.
But competition is starting to creep up on NVDA. That isn’t to say NVDA is any less attractive of a growth story, but it is to say that other players are entering the fold. That is what naturally happens in hyper-growth markets. Advanced Micro Devices, Inc. (NASDAQ:AMD) is plunging into the cloud computing and autonomous driving spaces. Same with Intel.
Intel’s push into these big growth markets got a big boost when it was announced that Waymo, the self-driving unit of Alphabet Inc (NASDAQ:GOOG), is using Intel chips to power its autonomous vehicles. The announcement was a pretty big testament to the power and relevance of Intel’s chips in high-end markets, especially considering Waymo cars with Intel tech have driven 3 million miles on public roads.
That is far more than any other autonomous driving fleet.
Essentially, then, the market leader in one of the biggest secular growth markets is using Intel’s technology.
Naturally, that implies Intel will likely gain significant market share in the autonomous driving market over the next several years. In fact, it has already been reported that Tesla Inc (NASDAQ:TSLA) has switched from NVDA to INTC for infotainment.
All in all, Intel is now involved in the big growth discussions surrounding autonomous driving and artificial intelligence. That means INTC has a long growth runway ahead of it.
Intel Is Growing from a Much Bigger Base
But that growth runway won’t feature any double-digit annual growth rates.
NVDA’s current year revenue estimate stands just shy of $9 billion, while AMD’s revenue is expected to be $5 billion this year. Intel is expecting revenues north of $61 billion.
It is this huge size difference which explains why INTC, despite now gaining exposure to promising secular growth markets, will post overall tepid sales growth. Thus, even with all these tailwinds, INTC is a low single-digit revenue grower. The top-line growth rate will likely hover in the 2-4% range into the foreseeable future.
Gross margin expansion thanks to average selling price improvements and volume leverage will likely continue. So will huge spending leverage and buybacks. Overall, then, that 2-4% sales growth should translate into something like 10% earnings growth over the next several years.
Intel trades at 13.2-times fiscal 2017 earnings estimates. A 13.2-times multiple for 10% growth seems like growth at a reasonable price. Remember that the S&P 500 is trading at a much bigger 2017 earnings multiple (19.5-times) for similar growth potential (roughly 11%).
Bottom Line on INTC Stock
INTC isn’t your typical growth stock, but it may be the cheapest way to play the AI and autonomous driving revolutions. Not many other stocks with AI and autonomous driving exposure trade at a low-teens earnings multiple.
Does that make INTC stock a buy? I think so. Street growth estimates seem conservative. Sentiment seems to be turning bullish. The momentum looks strong. The fundamentals are improving. Valuation remains reasonable.
All in all, it looks like INTC stock is a good one to own here and now.
As of this writing, Luke Lango was long INTC, NVDA, and GOOG.
