Year to date, shares of Intel(INTC) - Get Report are up about 11.5%. Last month management preannounced a strong third quarter and the news lit a fire under the shares. The company reports third-quarter 2016 on Tuesday.
On Sept. 15, Intel said its third-quarter fiscal 2016 earnings would be stronger than previously forecast. Better-than-expected demand for personal computers and inventory replenishment drove demand. Management raised guidance by 5%, or an additional $700 million. Analysts are now looking for revenue of $15.6 billion, up 8%, and earnings of 72 cents per share.
With the third quarter in the bag, investors will turn their attention to the fourth quarter, and more importantly to next year. The company will host an analyst meeting on Nov. 17.
The better-than-expected results were driven by stabilization in the PC business, which is still falling, just not as fast. For example, research firm IDC projects worldwide PC unit shipment declined 3.9% to 68 million units. In the first quarter of the year, worldwide PC shipments fell 11.5%, and in the second quarter units declined just 4.5%. So, a third-quarter decline of 3.9% looks great. And the comparisons only get easier going forward. Next quarter is up against a 10.6% drop.
Besides an improved PC outlook, average-selling prices improved as the mix shifted towards higher-priced gaming and enterprise units. Third-quarter gross margins will likely be up 120 basis points sequentially to 63%.
The data center business has picked up. Right now, data center revenue is almost 30% of total revenue, but it has had a mixed record at best. The data center business grew by 18% in 2014 and only 11% in 2015. Investors are hopeful that Intel can grow the business in the 10% to 12% range this year and next. If the company can do that, data center will be about 32% to 33% of total revenue and it will help to lessen the company's dependence on the PC business. Intel's other businesses, like Internet of Things, security, programmable solutions and non-volatile memory, are between 3% and 4% of revenue and won't move the needle for a long time.
With a stable PC business, Intel should report fourth-quarter revenue of $15.8 billion and earnings per share of 76 cents. That means fiscal 2016 revenue will be up 6% to $58.8 billion. If gross margins stay at 63% for the fourth quarter, earnings per share will be $2.60.
I think the next big catalyst for the stock is the analyst meeting. Over the years, I have been to several Intel analyst meetings and the company always makes a strong case for continued growth.
Right now, analysts are expecting fiscal 2017 to be up 3% to 5%. If management can convince investors that next year will be better, I think the stock will catch some upgrades. Just lifting the consensus growth rate from 4% to 6% should get the stock to the mid-$40s. Historically, Intel trades between 13 and 16 times forward estimates, so a 2017 estimate of $2.86 to $2.90 easily could get this stock 20% higher.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.