Sweta Killa: Currently, investors are fleeing from the Internet darlings on valuation and earnings concerns and are embracing the traditional tech giants like Intel (INTC), Hewlett-Packard (HPQ), Microsoft (MSFT) and Oracle (ORCL).
Out of these, Intel reported its Q1 earnings after the market closed yesterday. Though the world’s largest chipmaker missed slightly on the revenue front, it reported higher-than-expected earnings and gave an inspiring second quarter revenue outlook. This suggests an air of optimism in the sector, compelling many to look to this old-fashioned company amid weakness in the broad space.
Intel Earnings in Focus
The company reported earnings of 38 cents per share, a penny above the Zacks Consensus Estimate but 2 cents below the year-ago earnings. Revenues rose 1% year over year to $12.76 billion and missed the Zacks Consensus Estimate of $12.82 billion. Strong demand for tablet processors and data center services was offset by still weak PC sales. This is because more than 80% of revenues still come from PC and server chips.
Intel plans to introduce chips for tablets and other popular devices and build chips for the other companies as well in order to offset slowing PC sales. In particular, the company is seeing strong sales for chips that powers the ‘Internet of Things’, which includes a huge array of household, retail, industrial, automotive and other gadgets that are being computerized and linked together. Revenues climbed 32% in this division during the quarter.
Intel expects revenues in the range of $12.5–$13.5 billion for the second quarter of 2014. The midpoint is higher than the Zacks Consensus Estimate of $12.97 billion. Gross margin is expected to be around 63%. For full fiscal 2014, revenue growth will likely remain flat year over year and gross margin would be around 61%.
Following earnings announcement, INTC shares rose nearly 3% in the after-market hours, sending the stock to its highest level in more than four years. In fact, the stock is up 4% so far this year when compared to 3.4% drop in the tech-heavy Nasdaq Composite Index. This reflects bullishness for the company in the days ahead (read: Technology ETFs: Pain or Gain Ahead?).
This is particularly true as the stock had a solid industry Rank (in the top 25%) at the time of writing as per the Zacks Industry Rank. Further, INTC currently has a Zacks Rank #3 (Hold), suggesting room for upside in the coming months.
ETFs to Consider
Investors seeking to tap the opportunity for the upcoming surge in INTC shares could consider the following ETFs. These funds have larger allocation to this biggest semiconductor company and are poised to move higher with the rise in stock price.
Market Vectors Semiconductor ETF (NYSEARCA:SMH)
This is easily the most popular and liquid ETF in the semiconductor space with AUM of $331.1 million and average daily volume of roughly 1.4 million shares. The fund provides concentrated exposure to 26 global securities by tracking the Market Vectors US Listed Semiconductor 25 Index. Intel occupies the top position with 17.76% of assets.
While U.S. firms dominate the fund holdings at 73.8% of assets, Taiwan (12.6%), the Netherlands (8.5%) and United Kingdom (5.1%) take the remainder in terms of country exposure. The fund charges an expense ratio of 0.35%. The fund lost around 3.5% over the past 10 days and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a ‘Medium’ risk outlook.