Intel Corp. (INTC, Financial) had a decent performance in 2016, but the stock is down approximately 3% year to date. Despite efforts to diversify its revenue stream, the chip manufacturing giant is still heavily dependent on its client computing business. Even with a declining PC market, however, the revenue generated from that segment surged 2% in the previous year.
Moving ahead, the outlook for the PC market looks dim, which will certainly have a negative impact on the company’s client computing business. Therefore, to overcome this issue, the company is aggressively focusing on several other high-growth areas like internet of things and data centers.
In 2016, the revenue generated from the internet of things and data center segments surged 15% and 8% year over year. The revenue generated from the security segment also jumped 9%, indicating the company’s strategy to move away from PCs and focus on other growth areas is firing on all cylinders.
Apart from this, Intel is also betting big on the automotive industry. In 2016, the company formed an alliance with BMW (MIL:BMW, Financial) and Mobileye (MBLY, Financial) to deliver fully autonomous cars by 2021. Intel also recently announced a deal to acquire Mobileye for $15.3 billion, or $63.54 per share.
In 2016, Mobileye’s had revenue of $358.16 million and net income of $108.37 million. Intel is paying approximately 43 times revenue and 141 times earnings to acquire the company, which suggests it is paying a substantial amount of cash for a tier 2 autoparts supplier.
According to a report from mordorintelligence.com, the autonomous cars market is projected to grow to $60 billion by 2030. Mobileye develops vision-based advanced driver assistance systems (ADAS) that prevent collision and mitigation. Intel believes uniting Mobileye’s computer vision expertise with its high-performance computing and connectivity expertise will help it gain a strong position in the rapidly growing self-driving cars market.
In fact, Intel is not the only company to make such a big move in the automotive space. In 2016, Qualcomm (QCOM, Financial) announced it agreed to purchase NXP Semiconductors (NXPI, Financial) for $39 billion. Although the automotive industry presents huge growth opportunities for technology companies, it also consists of several well-established players such as NVIDIA (NVDA, Financial), which means Intel will face tough competition going forward.
Conclusion
Intel has made a great move by acquiring Mobileye, but it is not likely this acquisition will have a meaningful impact on the company’s performance soon. The automotive industry already consists of numerous players, which will certainly lower margins in the coming years.
Apart from the acquisition of Mobileye, Intel still looks like a good stock and has upside potential. The company’s aggressive focus on other growth areas will reap fruitful results in the coming years. Furthermore, the stock currently trades at a price-earnings (P/E) ratio of 16.72, signifying it is undervalued. The stock also offers a strong dividend yield of almost 3%.
As a result, Intel is a buy at its current market price.
Disclosure: I don't hold a position in the stock mentioned in this article.
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