INTC: from Best Idea Long to Bench Long
Our thesis on Intel was to be long into 4Q17/1Q18 mainly thanks to accelerating DCG (server) revenue growth. It worked. We think those drivers remain strong in the current quarter and will continue to push results to better than Street estimates. However, the delta between our estimates and Street has narrowed, and we are ahead by less than 2% on the topline and less than 5% on the bottom line (for the full year 2018). We still see a beat/raise setup into 1Q18 reporting season, but at this point we have better ideas Long in stocks that are facing positive inflections, with easier money to be made.
As the year progresses we will be curious to see if the strong PC outlook being communicated by the supply chain proves accurate or the normal chimera. We are concerned that 4Q18 will have an extremely tough server comparison, combined with outgoing bps of market share to all the relevant players nipping at the edges of the data center market opportunity. These risks create a potential Short opportunity in shares of Intel later in the year. We will come back with more analysis as the timing gets closer.
MU: from Best Idea Long to Bench Long
We only recently put Micron back on as a Best Idea Long (to view the note, CLICK HERE). So, what gives? We added MU to the best ideas list on February 5th, at which point we noted that the company had enough cash + cash flow in the present term to begin remaking its future away from the memory markets, which might look tougher on a 3-5 year time horizon as new NAND competitors scale and as post DRAM technologies move towards mainstream.
We suggested remaking the company in the direction of something with volume manufacturing and cost structure considerations, but with higher cash flow capture across the cycle such as analog or microcontrollers.
In essence the Long was a) to highlight a change in the balance sheet that opens new possibilities to remake the company towards markets with higher cross cycle cash flow and multiple, b) we were way ahead of Street on Feb-Q estimates, c) the stock was compellingly cheap at a 10% trailing FCF. Our bull case on the stock called for $50-55.
With the hiring of the x-ADI CFO, Street estimates moving much closer to ours (we are still ~10% ahead on topline for the year), and the stock hitting into our bull case range of $50-55, our thesis gets nearly completed, so we will tap the breaks and move to the sidelines. We’d like to think the bull case for MU stretches through November of the current year, but at this stage of the memory cycle, we are going to stick with our commitment to the $50-55 bull case and figure out next steps from here.
