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Earnings Preview: Chip Giant Intel Reports Q2 After Market Close

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July 27, 2017
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Chipmaker Intel (INTC) reports second-quarter earnings after market close on Thursday, July 27. As the broader semiconductor industry rallied over the past several quarters, Intel’s stock has declined about 5% so far this year.

As its stock declined in recent quarters, Intel management has acknowledged challenges that include growing competition as well as a softening PC market, which historically has comprised a majority of the company’s revenue. In 2016, Intel reported that its Client Computing Group generated 55% of total revenue. In the first quarter of 2017, the company reported revenue of $8 billion in that segment, up 6% from Q1 2016.

According to recent reports from research firm Gartner, worldwide PC shipments in the second quarter of 2017 declined 4.3% compared to the year-ago quarter, making this the 11th consecutive quarter of declines. Despite declines in the PC market, CFRA analysts “see an aging PC landscape and new innovative devices supporting enterprise purchases.”

Beyond the Client Computing Group, many analysts have focused on the company’s Data Center, Internet of Things and its Non-Volatile Memory Solutions divisions. In the first quarter of 2017, Intel reported Data Center revenue of $4.2 billion, Internet of Things revenue of $721 million and Non-Volatile Memory Solutions revenue of $866 million. Compared to the first quarter of 2016, the company reported those divisions grew 6%, 11% and 55%, respectively. 

Analysts have said they are focused on those divisions for different reasons. The company’s Data Center division has been a focus due to the growth in cloud computing, big data, artificial intelligence, and other trends driving demand for newer, high-powered products within the industry, which has resulted in a more competitive landscape over the years.

The Internet of Things and Non-Volatile Memory Solutions Groups have been a bigger focus among analysts due to their faster growth, but they represent a small portion of the company’s overall revenue. On top of its increased focus on new markets in recent years, Intel has said it has taken several steps to diversify its revenue streams, including the 2015 acquisition of FPGA maker Altera for $16.9 billion.

In addition to the Altera acquisition, the company is in the process of completing its proposed $15.3 billion acquisition of Mobileye NV (MBLY), which develops vision-based products for autonomous driving. Many major companies are currently in the race to develop self-driving technologies, working on a wide range of components that will be required for driverless cars. 

Intel Corporation (INTC) Stock YTD Performance on thinkorswim platform

FIGURE 1: STUCK IN A RANGE?

Intel (INTC) has been see-sawing for the past several quarters, bouncing between $33 and highs in the mid-$38 range. So far this year, the stock is down 5.05% compared to the S&P 500’s (SPX) 9.74% increase. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Intel Earnings and Trading Activity

For its Q2 results, Intel is expected to report adjusted earnings of $0.68 per share, up from $0.59 in Q2 2016, on revenue of $14.4 billion according to Wall Street consensus analyst estimates. Those earnings exclude acquisition-related items and restructuring charges. Revenue is expected to increase 6.5% from the $13.5 billion it reported last year.

The stock hit a multi-year high of $38.45 at the start of the year and traded in a pretty tight range for much of the first-half of the year. The tech selloff in June hit Intel shares, and it declined to a 52-week low of $33.23 on July 10. It’s bounced back a little since then and is down 5.05% so far this year.

With shares closing at $34.75 yesterday, traders have priced in about a 3% potential share price move  in either direction around the company’s earnings release, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term trading at the July 28 expiration, calls have been active at the 34 and 34.5 strike prices while puts have been active at the 33 and 34.5 strikes. As of this morning, the implied volatility sits at the 72nd percentile. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Looking Ahead

In addition to Intel, Amazon (AMZN) reports its results after the closing bell today as well. Next week, we’ll see results from a few sector giants including Pfizer (PFE) and Apple (AAPL). If you have time, make sure to check out today’s market update to see what else is happening.

Good Trading,
JJ
@TDAJJKinahan

NC
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