Argus Believes Intel's Post-Earnings Pullback Has Fully Discounted Near-Term Challenges In Data Center Business

Jim Kelleher of Argus said the 4 percent drop in Intel Corporation INTC shares following the Q2 print fully discounts near-term challenges in the Data Center business.

Kelleher reiterated his Buy rating and a target price of $41, saying, "INTC shares appear attractive based on historical comparable valuations and our more forward-looking discounted free cash flow model."

For the second quarter, Intel posted 2.6 percent top-line growth to $13.5 billion. Non-GAAP EPS rose 4 percent to $0.59 and came in $0.06 above the consensus forecast.

However, shares fell 4 percent following the release as revenue came in below the $13.55 billion consensus forecast. Investors appeared particularly concerned about the weak 5 percent revenue growth in Data Center Group, which is below the company's long-term goal for this business. In addition, memory sales and margins also missed expectations.

On the positive side, the client business exceeded forecasts on better-than-expected global PC sales.

Intel also maintained its full-year 2016 guidance for mid-single-digit revenue growth, while mid-range revenue guidance for the third quarter was well above expectations at $14.9 billion.

The analyst said Intel's data center and cloud presence would benefit from the newly acquired Altera's FPGA business.

"Expected competition from ARM-based servers has yet to materialize, and we think that Intel has several more years of near-hegemony in this space. Assuming that Intel succeeds in growing its focus areas while deemphasizing PCs, the company's gross margins and operating margins should expand over the next two years," Kelleher noted.