Intel (INTC) surprised markets last week with top and bottom line beat, as well as increasing guidance for the 4th quarter. Intel now see's 71B in revenue for the year and $4.60 a share in EPS.

In my series Intel the 15+ Year Breakout I have been highlighting the company and most importantly business shift to DCG. You can see parts 1-3 here, but today I want to focus a bit more on the company priorities going forward as there is still a lot of work ahead.

Intel: The 15+ Year Breakout

Intel: The 15+ Year Breakout - Part 2

Intel: The 15+ Year Breakout Part 3

Management has highlighted 3 main priorities going forward, accelerate growth, execution, and capital returns, so I thought I would briefly walk through each.

Accelerate Growth

Total top-line growth has essentially been flat year over year however when you look across the semiconductor space Intel has been pretty much in the middle of the group.

Of course the bigger picture to the growth story is the shift to the DCG business, and primarily why I started writing this series in the first place.

On the investment side, I like looking for stories where shifts in operations, divisions, or technology etc are taking place. This can include acquisitions and spin-offs as well. This is an older chart but the shift with price can be visually seen here.

In Intel's case it has been this multi-year strategic move to data and edge computing which is set to further transform the company as the revenue mix continues to shift.

(2019 Intel Investors Meeting)

The quarter saw DCG revenue growth at 4% year over year, and now comprises 49.5% of the mix, with operating margins slipping slightly to 49%.

Note the 6% decline in unit volume which was offset by a rise in ASP's due to higher end product sales. Management expects this to normalize over time, which in my view will likely be offset by the larger market opportunity as well. Keep in mind this was coming off tough comps from the year before as well.

The bigger picture, and main takeaway, is the same takeaway, which is that DCG now comprises 50% of sales.

Intel Q3 2019 Earnings

The following slide speaks to the larger, longer-term data opportunity which is expected to grow in the 6+% range. (2019 Intel Investors Meeting)

The following was from an article in mid 2018, but also speaks to this opportunity. I wanted to add it because I personally find it to be one of the more compelling stories in general even beyond Intel. That is the overall growth in data, and how it will ultimately be utilized.

Intel spies $200bn in ‘data-centric’ opportunity combining cloud, edge and AI

April 2018 Cloudtech

Execution

Execution in the intermediate-term is one area worth a slightly deeper dive given the quarter, but in the context of the overall market.

Chip shortages and the need to increase capacity are a top priority as demand exceeded expectations. Intel's execution issues with 10nm are also well known, however the call was digested well in my view, particularly with respect to the timeline and process improvement comments.

Intel Gross and Operating Margins

Gross margins on a GAAP basis did drop below 60%, with operating margins at ~30%. Management commented on the awareness of an increased competitive environment next year which naturally flows through to margins (and guidance was lowered already earlier in the year).

Semiconductor Operating Margins

When you take a step back however, the operating numbers on both an absolute and relative basis are still strong.

A look at relative operating margins in some larger name semiconductors shows Intel still in the upper end of all names.

Valuation and Capital Distribution

A quick glance at operating margins vs a more simple price to sales ratio in the semi space also shows room for multiple expansion (be aware this is a more simple way to look at things).

The key point being even with erosions in margins, much of this one could argue is priced in (post earnings price action suggests this as well).

Cash Flows

Cash flows remain strong as the company just did 10.7B on 19.2B in revenue for the quarter. The company currently trades at about 8X's CFO TTM.

Shareholder Yield

Shareholder yields are still strong as well. Although the dividend yield has come down to the lower end of the range, the buyback yield has quietly risen over the last 12 months.

The impact of this can be seen on the long term share count which are down 20% over the last 8 years, including the acceleration to the downside since 2018.

There are numerous metrics one can look at here but they all come down to about the same story, low double digit multiples, strong operations, good distributions.

The bigger opportunity in my view is a high single digit top-line growth rate, weighted towards higher margin DCG, that then surpasses the 50/50 rev mix as well. That likely would expand the multiple significantly. This remains to be see, but would be the reward side of the overall equation.

Most readers know I like to add the longer term chart to my work and frankly this entire series began as a conversation of the 20 year base breakout combined with the strategic shift to DCG.

I continue to see that trend intact. A look at the long term uptrend this cycle vs last also shows some valuation comparisons that simply are night and day. The main takeaway from this chart is the stock has quietly trended higher in with consolidation ranges along the way.

Performance

Performance continues to outperform at Fusion Point. There have been some significant downshifts in risk exposure in the last few months, offset by momentum/macro shorts and value driven longs. I continue to look for opportunities utilizing fundamentals, technicals, and behavioral finance.

Fusion Trading: Combining Fundamental Research with Technical Price Action and Behavioral Finance

Disclosure: I am/we are long INTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.