Intel Corp. INTC recently raised its guidance for the third quarter of 2016. The company now expects revenues to be $15.6 billion (+/- $300 million), compared with the earlier range of $14.9 billion (+/-$500 million). Per management, the revised guidance reflects improving PC supply chain inventory.
Intel also increased its gross margin expectations by couple of percentage point (pp) to 63% (+/- 1 pp). Research & development (R&D) and marketing, general & administrative (MG&A) are anticipated to be approximately $5.2 billion, $100 million higher than the previous guidance of approximately $5.1 billion.
Following the news, Intel shares hit a 52 week high of $38.05, eventually closing at $37.67 on Sep 16, which exhibits almost a 30% return over the last 12 months.
Intel sees some signs of improvement in PC demand, which is in line with forecasts from market research firms – Gartner and IDC. Both expect a slight recovery in PC shipments in the second half of the year. The firms also believe that the industry will witness a faster commercial transition of Windows 10 toward the end of this year. (Read more: PC Shipments Down in Q2 but 2H16 Will Be Better: Gartner, IDC)
Although improving PC trends are positive for Intel, we don’t expect the market to rebound aggressively in the near future. We believe the company’s growing focus into areas with better growth prospects, such as the data center, memory and Internet of Things (IoT) businesses are key catalysts.
Intel’s data center business and cloud have been registering significant growth. The company’s bolt-on acquisition strategy is driving growth. The recent acquisitions of artificial intelligence (AI) startups Movidius and Nervana Systems will help Intel in strengthening its footprint in data center, machine learning, deep learning and IoT businesses.
Moreover, Intel’s recently launched 7th generation CPU –14nm Kaby Lakechip holds promise. Apart from improved graphics performance, better CPU performance and longer battery life Kaby’s biggest feature is improved support for 4K, which is likely to be a big positive in the long haul.
Zacks Rank & Key Picks
Intel currently carries a Zacks Rank #3 (Hold). Better-ranked stocks include NVIDIA Corporation NVDA, STMicroelectronics NV STM and Texas Instruments Inc. TXN. While NVIDIA sports a Zacks Rank #1 (Strong Buy), both STMicroelectronics and Texas Instruments carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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