Intel Stock Forecast: Greatly Reduced Contra Revenue Is A Big Tailwind For Intel (INTC)

motek 1The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology  – Senior Analyst at I Know First

Intel Stock Forecast

  • Intel is reducing its contra revenue on mobile application processors for tablets/smartphones.Intel
  • Reduction in contra revenue could substantially improve operating profits of Intel’s PC/Mobile chips division.
  • Intel is now refocusing on supplying higher-margin x86 processors to pricey 2-in-1 tablet/notebooks like the Surface Pro 4.

The Intel-powered luxury Microsoft Surface Book laptop is seeing brisk pre-order demand.

Compared to its technology sector peers, Intel’s (INTC) stock performed decently since 2012. Aside from the dividend payouts, INTC’s stock price actually went up by 50% since 2012. I believe INTC could hit its old 52-week high of $37 again early next year once more investors realize that Intel is aggressively reducing its contra revenue on low-margin  Atom processors for tablets and smartphones.


Intel Stock Forecast

Intel has cancelled its $8 discount for OEMs who use Bay Trail Atom SoCs for Android/Windows tablets. Intel is now only offering a $2-$3 discount on newer Cherry Trail Atom processors. This should help substantially reduce the contra revenue that Intel is wasting on its mobile processor strategy.

The costly contra revenue program of Intel that helped it become the world’s second supplier of tablet application processors in 2014, was a thorny issue for many investors who hated the 9-figure operating losses it caused. Now that Intel is now again focusing on supplying higher-margin processors for PCs products, I see more hedge fund managers going long again on Intel starting this last quarter of 2015.

Why It Matters

As per the chart below, Intel is again slowly regaining the trust of hedge fund managers. I hope this article would inspire more institutional investors to boost their INTC holdings beginning this last quarter of 2015. Deliberately selling products at below cost is a big no-no for most hedge fund managers.

In spite of the 40 million tablet processors that Intel sold last year, many fund managers reduced their INTC holdings starting Q2 2014. Now that Intel has stopped its $8 discount/contra revenue on Atom tablet processors, I expect Intel to receive a bullish push from institutional investors who like it when Intel focuses more on high-margin products.

Intel Stock forecast

Those highly-paid hedge fund managers above obviously sees long-term opportunities in Intel that is why they are loading up shares. Retail investors should take into account that it is always a safer technique to heed the actions of institutional investors.

Going For High-End Versatile PC/Tablet Products

I predict that INTC will hit $35 before 2016 ends primarily because of the obvious advantage of 2-in-1 laptops like the $1,299 Surface Pro 4 and Surface Book. These two products from Microsoft (MSFT) are packing very pricey 6th generation Skylake processors and premium hardware specs. The first batch of the Surface Book sold out within five days after Microsoft starting accepting pre-orders for it.

My point is that Intel’s high-end 6th Gen Core m3, m5, Core m7 processors have a bright future in the new hot trend toward high-end laptops that also offers the versatility of a tablet. Enterprise users and creative professionals are falling in love with the Surface Book and Surface Pro 4 because they have the compute power of a real laptop and they can also be used as digital drawing tools using AutoCAD or Adobe (ADBE) Illustrator.

Almost all new high-end Windows 10 laptop/tablet hybrids from Dell, Hewlett-Packard (HPQ), Lenovo, and Acer are using Intel 6th gen processors. Even Apple (AAPL) which also exclusively uses Intel processors, is again using the latest 6th Generation Skylake processors for its 2015 refresh of its popular iMacs.

The PC industry’s robust loyalty toward new and old Intel-made processors should go a lot in improving the operating margins of Intel in FY 2016.

My Takeaway

Investors should go long on INTC when it is still trading below $33. The I Know First algorithmic signal is still not strong enough to enter the position on INTC. I am recommending to wait a little longer so when the signal is right take advantage and enter the position.  The implication of a reduced contra revenue from Intel is very clear and this is the main reason why we must wait until we have the green light from the Forecast. I understand the great economic benefits when Intel is no longer giving $8 subsidies on millions of Atom mobile processors and its repercussions.

Intel Stock Forecast

The -1.03 One Year prediction of I Know First’s machine for Intel might change for the better once it notices that hedge fund managers starts adding up on their INTC holdings. These managers are likely to do so next year because I firmly believe that the 9-figure operating losses due to contra revenue is no longer the case for Intel in 2016.

For the long term, INTC is a Strong Buy.