Is Intel Corporation Stock a Buy?

Shares of Intel have rallied 36% over the past 12 months, handily outperforming the Nasdaq's 16% gain. The chipmaker is generally considered a conservative tech play thanks to its dominant market share of PC CPUs, but investors might wonder how much upside potential the stock has left. Therefore, let's discuss three factors that could affect Intel's future.

Source: Flickr,

What the valuations tell usIntel currently trades at 14 times trailing earnings, which is considerably lower than the P/E of nearly 18 at the end of 2014. That also makes Intel cheaper than its industry peers. Intel's x86 rival,AMD , is currently unprofitable. Its main mobile rival, ARM Holdings , is trading at 66 times trailing earnings.

Intel has a five-year PEG ratio of 1.6, compared to ARM's ratio of 2.1, based on Thomson Reuters estimates, indicating its stock is cheaperbased on future earnings projections. Analysts expect Intel's earnings in 2015 to rise 3% year over year to $2.38 per share. If Intel meets that estimate and its P/E remains between 14 and 18, the stock could be "fairly valued" between $33 and $43 per share.

Potential catalystsAs of the third quarter of 2014, Intel CPUs respectively powered 90%, 82%, and 98% of notebooks, desktops, and servers worldwide, according to IDC estimates. That dominance helped Intel's PC client and data center operating income respectively climb25% and 31% year over year in 2014.

Together, those two divisions accounted for 88% of Intel's top line, and will likely keep growing as the PC market bounces back. Gartner expects worldwidePC shipments to only rise 1% in 2015, but then grow nearly 4% in 2016 as laptop and desktop owners upgrade to "ultramobile premium" devices such asMicrosoft's Surface Pro and Apple's MacBook Air, which both run on Intel's Haswell processors. Intel's newer 14-nanometer Broadwell processors, which consume less power and don't require fans, are intended to help OEMs develop comparable ultrathin notebooks and hybrid devices.

Intel has also aggressively expanded its presence in the Internet of Things, or IoT, a market IDC expects to grow from $4.8 trillion in 2012 to $8.9 trillion in 2020. The company in July set up a dedicated IoT segment, which launched tiny system on chips such as Quark and a security platform for deploying IoT devices. Last year, Intel's IoT revenue rose 19% to $2.14 billion as operating income grew 12% to $616 million.

Potential pitfallsDespite Intel's promising progress in PCs, servers, and IoT devices, it is losing a lot of money on mobile devices. To catch up to ARM's partners, which dominate the smartphone and tablet markets, Intel gives its partners steep discounts on Atom chips, co-marketing agreements, and financial assistance in redesigning ARM-based logic boards for Atom chips.

Those costly subsidies caused Intel's mobile division to post an operating loss of $4.2 billion last year -- down from a loss of $3.1 billion in 2013. Intel claims it will eventually phase out these subsidies, but that could cause its handful of partners -- including Lenovo, Asus, and Dell -- to back ARM-licensed designs instead.

Source: Intel.

Meanwhile, Intel could cannibalize the mobile business by opening up its foundry to mobile chip manufacturers, which it hopes will become a new source of revenue. For example, if Intel eventually agrees to manufacture ARM-licensed designs for Qualcomm and other fabless players, it could expedite the demise of its own x86 mobile efforts.

The verdictWith its reasonable valuation and dominance of PC-based CPUs, Intel is a fairly safe tech stock to buy. New CPUs will keep its core PC and server businesses strong, while the IoT business could evolve into a new pillar of growth. Its mobile losses look bad, but they certainly won't cripple the company, which generated $55.7 billion in revenue in 2014. Intel's stock probably won't soar to $50 anytime soon, but it still pays a forward annual dividend yield of 2.8% to patient investors.

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Leo Sun owns shares of Apple. The Motley Fool recommends Apple, Gartner, and Intel. The Motley Fool owns shares of Apple and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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