Was Intel's Bar Too High?

Shares of Intel lost nearly 2 percent Wednesday morning after the company reported its third-quarter results on Tuesday.

Intel reported revenue of $14.5 billion (marking a 10 percent quarter-over-quarter gain), which topped the $14.2 billion the Street was expecting. Pro forma earnings per share of $0.64 was also higher than the $0.59 per share the Street was looking for.

FBR: Bar ‘Was Too High'

Christopher Rolland of FBR & Co. commented in a note that Intel's execution in the quarter was "generally solid," but the "strong" stock surge heading into the print has created an "unreasonably" high bar, which was missed. The analyst highlighted a weaker-than-expected DCG guidance to a low-double-digit growth from 15 percent-plus year-over-year.

Rolland continued that one of the main growth stories for Intel has been the "strong" double-digit DCG growth. The analyst suggested that Intel will not be able to grow the segment at 15 percent, rather "something closer" to 10 percent.

Rolland pointed out several positives from the quarter, including a better-than-expected PC pricing environment and a $400 million reduction in capital expenditure expectations.

Finally, Rolland stated that some "skeptics" were anticipating Intel's 2015 earnings to trough at just $2.00; it appears earnings may trough 10 to 15 percent higher.

Shares remain Outperform rated with an unchanged $38 price target.

Related Link: Intel Tops Q3 Estimates

Morgan Stanley: Remaining Cautious

Joseph Moore of Morgan Stanley commented in a note that he remains cautious following a better-than-expected quarter in which PC average selling prices rose more than expected, which offset weaker units and slower data center growth.

Moore questioned if the improvement in PC pricing is structural or temporary and suggested that a portion of the uptick is temporary given: 1) a shift toward developed markets reflecting emerging market weakness; 2) an excess of Windows 8/ lower end inventory, which is being "burned off," resulting in a "richer" mix; 3) a slowing in replacement rates for midrange PCs offsetting steady replacement rates for "enthusiasts," which also improved the mix.

Moore also added that the lower units and higher average selling prices reduce his concerns about growth in the fourth quarter, but he still remains concerned that customer inventories remain high and 10 nm startup expenses will pressure the company's margins in 2016.

Shares remain Underweight rated with an unchanged $31 price target.

Wedbush:'Impressive' Results Despite ‘Tough' Macro Headwinds

Betsy Van Hees of Wedbush commented in a note that Intel "handily" beat expectations in its third quarter.

The analyst stated that while she maintains a "cautious" stance on the entire sector due to its exposure to the "uncertain" macro environment, Intel remains a "very attractive" story to "weather the volatile market."

Van Hees cited four reasons for investors to remain positive on the stock: 1) its pending acquisition of Altera Corporation ALTR, 2) a product cycle "dominant" position in datacenter, 3) an annualized dividend yield of 3 percent and 4) opportunities for "strong growth" in NAND and Internet of Things.

Bottom line, even though macro headwinds will persist into the fourth quarter, Intel's revenue guidance of $14.8 billion (+/- $500 million) was still in line with the Street's expectations and implied GAAP earnings per share of $0.63 was two cents above the Street's expectations.

Shares remain Outperform rated with a price target raised to $36 from a previous $35.

RBC: Pricing Leverage Drives Better-Than-Expected Quarter

Amit Daryanani of RBC Capital Markets commented in a note that Intel's "impressive" beat was largely driven by pricing leverage. The analyst added that while the company was fairly certain that the PC supply chain is in "balance," an under-shipment in the quarter may reflect Windows 8 devices till being liquidated.

Daryanani also commented that despite Intel's lowered expectations for its DCG division, the company should benefit from better gross margin and operating leverage, both of which could "protect" its earnings even if "demand doesn't show up."

Shares remain Sector Perform with a price target raised to $34 from a previous $33.

Jefferies: Gross Margins Will Expand Toward 70 Percent

Mark Lipacis of Jefferies commented in a note that he upgraded shares of Intel back in September 2013 based on the thesis that Intel will extend its cost and performance leadership over its competitors. The analyst is now projecting that the company's gross margins will expand towards 70 percent over the coming years.

Lipacis offered four reasons to support his beliefs:

• 1. DCG is a $16 billion annual segment with a 50 percent operating margin, which accounts for over 50 percent of company wide EBIT. The segment is also estimated to be running at a 75-80 percent gross margin profile, which will create an "upward bias" on company wide gross margins.
• 2. Intel's revised manufacturing cadence to 2.5 years from 2.0 years helps the company's gross margin in two ways: 1) a better fixed cost absorption as assets are amortized over a larger number of units and 2) longer time on the same manufacturing process translates to better yields.
• 3. Intel's capital expenditure outlook of $7.3 billion (+/- $500 million) for 2015 represents a 28 percent decline from 2014. The lower figure should translate to a 24 percent growth in 2015 free cash flow.
• 4. Intel's "increasingly unique ability" to make smaller, cheaper and faster transistors versus its peers is being "valued by and paid for" by its customers.

Shares remain Buy rated with a price target raised to $37 from a previous $36.