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Why Intel Is a Cheap Bet on 5G, Artificial Intelligence, and the Internet of Things

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Personal computers have long been the destination for many of
microprocessors, but the company is poised to deliver a swath of chips for evolving markets that should drive sales well into the future, an analyst wrote Monday.

In upgrading Intel (ticker: INTC) stock to Overweight from Sector Weight, KeyBanc Capital Markets analyst Weston Twigg pointed to Intel’s opportunity around data centers, the internet of things, machine learning, and 5G-enabled devices. Intel itself has estimated that the opportunity for non-personal computer, data centric chips to be somewhere in the neighborhood of $220 billion by 2023, and Twigg notes that the company is well positioned to take a chunk of the market.

Shares of Intel rose 1.3% Monday, to $60.10. Twigg has a target price of $82 on the stock.

Twigg’s team chose this moment to upgrade Intel, he said, because the company has worked through its manufacturing issues, is poised to capture the market beyond PCs and servers, and its stock is relatively cheap compared with other technology companies and rivals including
(NVDA) and
Advanced Micro Devices (AMD).

“We believe Intel has finally worked through the stages of grief (beginning with denial, ending with acceptance) after losing its manufacturing technology lead (its former source of competitive advantage) several years ago,” Twigg wrote in his Monday note to clients.

Intel has invested heavily in is its efforts around machine learning and artificial intelligence, which Twigg predicts will be embedded in nearly every type of computing device in the future. Intel’s 2019 AI sales rose to $3.8 billion from $1.7 billion the year before, and Twigg writes that the addressable market for such products will be $25 billion by 2024, with some estimates north of $50 billion by 2025, he acknowledges.

“The shift to greater image and video processing, voice recognition and natural language processing, and smart technologies has accelerated the demand for creating machine learning algorithms (training) and therefore an even greater need for inference (using these trained models to make predictions),” Twigg wrote.

Although the rise of data centers has created opportunities for AMD and Nvidia—and newer entrants such as Alphabet’s Google (GOOGL) (GOOG),
(AMZN), and
(MSFT)—Intel has been no slouch. The Santa Clara, Calif.-based company expanded its revenue from data centers to $23.5 billion in 2019 from $16 billion in 2015 and is set to grow it another 12% this year.

The so-called internet of things group at Intel is its third-largest segment and was growing at a double-digit rate until the pandemic. Twigg regards it as the most innovative within the company as it is essentially tasked with creating new uses for microprocessors. “We believe the group acts almost like an incubator for compute applications,” Twigg wrote. Its internet of things revenue reached $1 billion in the third quarter of 2019 and Intel predicts the market will grow to roughly $30 billion by 2022.

During the decadelong bull run, Intel significantly underperformed the tech sector, gaining 290%, compared with the
iShares PHLX Semiconductor ETF
(SOXX) which rose 538% and the
Invesco QQQ Trust,
an ETF that tracks a basket of Nasdaq-listed stocks, which gained 475%, according to Twigg’s note.

Intel also looks inexpensive relative to rivals, trading at 12 times 2021 estimated earnings, compared with Nvidia, which trades at 37 times forward earnings, and AMD, which trades at 35 times next year’s earnings estimates.

Of the 44 sell-side analysts who cover Intel stock, 18 rate the stock at the equivalent of a Buy, 21 have a Hold, and five have a Sell rating, according to FactSet. The average analyst target price is $64.60.

Through Monday’s trading, Intel stock is up 0.4% on the year, while the
S&P 500
index has dropped 5.9%.