Why Merrill Lynch Gave Intel a Huge Upgrade

By Chris Lange Updated Jan 31, 2:29AM EST · Published Jan 4, 1:46PM EST

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Why Merrill Lynch Gave Intel a Huge Upgrade — © JasonDoiy / Getty Images

Intel Corp. (NASDAQ: INTC | INTC Price Prediction) shares jumped to close out the week, in part due to markets in general pushing higher, but also a key upgrade from Merrill Lynch helped as well.

Merrill Lynch upgraded Intel to a Buy rating and raised its price objective to $60 from $52, which implies upside of roughly 35% from the most recent closing price.

The firm believes that Intel is a compelling large-cap investment levered to multiple secular advances (cloud, artificial intelligence, 5G, autonomous cars, Internet of Things). Merrill Lynch’s prior concerns regarding macro, competition and 10nm product delays remain, but the firm thinks Intel’s expanding opportunity set, incumbency, scale and U.S. manufacturing base provide relative stability.

Intel’s transformation to a more data-centric (B2B) company can expand margins and free cash flow above consensus, with upside if Intel’s next CEO rethinks the low-return memory business, according to Merrill Lynch.

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In its report, the firm went on to say:

We model 2.5% sales growth in 2019, tweaked down modestly, more back-half weighted and a deceleration from 13% growth in 2018, on tougher data center comps. Global growth slowdown is a risk but product shortages in late 2018 and replacement demand from aging base of PCs helped Intel avoid excess inventory concerns seen by its peers. Intel’s 2.5% growth-rate is better than our core-semis (ex-memory) forecast of 1.5%, inc. below 1% organic growth at large-cap peers. Our model already reflects 300 bps share loss in PCs/servers processors to AMD, though we believe the expanding pie and Intel’s incumbency, product breadth, and larger addressable market in networking and 5G (where AMD does not participate) can help Intel offset share losses.

Overall, Intel’s increasing focus on data-centric products implies an expanding opportunity, greater SG&A leverage, higher profitability and more consistent free cash flow generation. As a result, Merrill Lynch raised its 2019/20 EPS estimates further above-consensus to $4.80 and $5.25, respectively, ahead of the consensus estimates at $4.55 and $4.69.

Shares of Intel were last seen up about 6.5% at $47.36, in a 52-week range of $42.04 to $57.60. The consensus analyst price target is $54.34.

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About the Author Chris Lange →

Chris Lange is a writer for 24/7 Wall St., based in Houston. He has covered financial markets over the past decade with an emphasis on healthcare, tech, and IPOs. During this time, he has published thousands of articles with insightful analysis across these complex fields. Currently, Lange's focus is on military and geopolitical topics.

Lange's work has been quoted or mentioned in Forbes, The New York Times, Business Insider, USA Today, MSN, Yahoo, The Verge, Vice, The Intelligencer, Quartz, Nasdaq, The Motley Fool, Fox Business, International Business Times, The Street, Seeking Alpha, Barron’s, Benzinga, and many other major publications.

A graduate of Southwestern University in Georgetown, Texas, Lange majored in business with a particular focus on investments. He has previous experience in the banking industry and startups.