Part 6

Intel Corporation (INTC)

Company Background

An unjustly forgotten giant.

Intel Corporationan is an American multinational corporation and technology company headquartered in Santa Clara, California, in Silicon Valley. Intel designs, manufactures, and sells essential technologies for the cloud, smart, and connected devices worldwide.It offers platform products, such as central processing units and chipsets, and system-on-chip and multichip packages; and non-platform or adjacent products comprising accelerators, boards and systems, connectivity products, and memory and storage products.

The company also provides Internet of things products, including high-performance compute solutions for targeted verticals and embedded applications; and computer vision and machine learning-based sensing, data analysis, localization, mapping, and driving policy technology. It serves original equipment manufacturers, original design manufacturers, and cloud service providers.

Current Position – Financial Performance and Future Growth Prospects

As we all know, the tech sector has been on fire with a 52% return in the last 12 months, and a lot of the companies that have outperformed the sector have somewhat stolen the spotlight with their mind-blowing returns. Furthermore, it feels like most of the young, ambitious and hungry retail investors focus their attention only on the current “hot stocks” that are being talked about on TV, Newspapers or Online all the time. This is one of the major reasons why a phenomenal company like Intel Corporation has fallen out of favor, appreciating only 4% YTD. It is important to note though, that the more competitive landscape has not been the only reason for Intel’s stock sluggish performance recently as the company struggled with a shortage of 14-nanometer chips, late deliveries of 10-nanometer chips, and the delayed launch of its upcoming 7-nanometer chips. However, we see most of these issues as short-term hurdles rather, than long-lasting problems that will hinder this giant’s long-term growth.

The senior management of the company has done a wonderful job in adapting to the current fast paced and quickly changing market. The world’s largest semiconductor company and primary supplier of microprocessors and chipsets, has put forth a lot of efforts to gradually reduce its dependence on the PC-centric business by moving into data-centric businesses — such as AI and autonomous driving.

In fact, its data-centric businesses accounted for 48.3% of revenues in fiscal 2019. This underscores the fact that the company’s data-centric businesses are helping it generate revenues close to what it generates from the PC business. The contribution of data-centric businesses to the total revenues has grown gradually over the past five years and should become significant in the near future.

Nevertheless, the company continues to maintain its dominant market share for microprocessors in both consumer and enterprise markets. Management says that the higher-end business in more developed economies continues to look up, but the new strategy should help it get into many more device categories, where Intel products will continue to enjoy a premium based on performance and cost of ownership.

Just to point out to you how big Intel actually is you should keep in mind that the company generated $71.97 billion in revenues in 2019. As a reference, AMD ($6.73 billion) and NVIDIA ($11.72 billion) generated less than $20 billion in total revenues combined throughout 2019.

The key business segments for Intel Corporation are as follows:

Data Center Group (DCG), Internet of Things Group (IOTG), Mobileye, Non-Volatile memory solutions group (NSG) and Programmable solutions Group (PSG) and All Other business units form the crux of Intel’s data-centric business model.

DCG accounted for 33% of revenues in 2019. The segment deals with servers, workstations and other products for cloud, enterprise, and communication infrastructure market.

IOTG offers high-performance compute (HPC) solutions and embedded applications. The segment accounted for 5% of 2019 revenues.

NSG contributed 6% to revenues in 2019. The segment primarily offers memory and storage products like Optane and 3D NAND technology, primarily utilizing SSDs.

PSG segment that accounted for 3% of revenues offers programmable semiconductors, primarily FPGAs and structured ASICs.

Mobileye contributed 1% to revenues in 2019. The segment is engaged in developing computer vision and machine learning-based sensing, data analysis, localization, mapping, and driving policy technology for ADAS and autonomous driving. Intel acquired Mobileye in 2018.

Client Computing Group (CCG), which accounted for 52% of 2019 revenues, is the company’s largest segment. The company is the dominant provider of computer CPUs. It began shipping 10 nanometer (nm) based 10th generation processors (previously referred to as Ice Lake) in 2019.

We know that it seems that Intel may have been late to the mobile market, but in reality the company has wasted no time getting into the Internet of Things. Market research from Gartner, IDC and other independent firms say that this market will see strong growth over the next few years. Intel’s renewed focus on supplying not just chips but associated hardware puts it in a position of strength here. The $16.7 billion acquisition of Altera back in 2015 should also help the company’s future growth prospects. The biggest positive in this respect is the nascent stage of the IoT market, which indicates potential for expanding exponentially.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that took the price from the March 23rd lows of around $44 to the June highs at $64, for an outstanding 45% increase in just couple of months. However, the stock didn’t stay there for long as a combination of a high profit taking interest and some further selling pressure took the price down again at the end of July to the $47-48 strong horizontal support zone. Since then, we have seen a volatile and choppy sideways price action between $48-52 levels. The stock is currently sitting at the $51.30 mark after rebounding once again from its October lows of around $44. In October, we recommended the stock at $48, which ended up being somewhere in the middle of the $44-52 range that the price has moved within. However, we see few strong horizontal resistances that are threatening the current bullish move. The first one could be found at the $52.50 level with the 2nd one lying just above the $55.50 level. At the same time, it is important to note that the most recent sharp appreciation of the stock sent the price above both its 50 DMA and 100 DMA, which is quite bullish from a technical standpoint. We can find the 100 DMA lying at the $49 mark and with the 50 DMA right underneath it curving upwards. Today’s price action on the daily chart shows a bullish continuation candlestick, which in turn confirms the strength of the current bullish move and signals a potential move up towards the $52.50 mark in the coming days. This up move was anticipated as the stock built a meaningful support base around the $44-48 mark throughout the last couple months. However, we believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19, the upcoming presidential elections, the economic recovery etc. – which would probably mean that we could be in for a continued sideways and choppy price action in the coming months. At any rate, we our analysis shows that the uneven capital allocation across the different market sectors will continue to support the tech sector as well as the stocks in it. The large institutional investors will start looking for places to reinvest the tremendous profits that they have generated from the likes of ZOOM, TESLA, NETFLIX, Shopify etc. throughout the last 3-6 months, which will lead them to stocks like INTC!

We would wait for a short-term pullback towards the $48 mark and start buying just above the support at $47. Should the price drop further, we would be interested in adding more to our buy positions at the $44 and $41 levels, which would improve our average cost basis. Our first take-profit target would be set at $56, followed by the next target at $63 where we would be fully cashing in our profits.

We are bullish on the INTC’s stock and believe that any profit-taking corrections would give us a great opportunity to buy the stock at a good discount. This, in turn would give us a chance to maximize our profits to the upside, once the stock resumes its uptrend movement. Furthermore, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing exhaustion of the recent up move and are signaling that a potential return-move to the $48-50 range might occur very soon. This will be the right time to jump on the bullish Intel train, that will take you up to the $60 mark in the coming weeks and months.

Electronic Arts Inc. (EA)

(Last recommended @124.5, it went up to $140 in 4 weeks = 12.4% return)

Company Background

Headquartered in Redwood City, CA, Electronic Arts is a leading developer, marketer, publisher and distributor of interactive games (video game software and content). It is the second-largest gaming company in the Americas and Europe by revenue and market capitalization after Activision Blizzard and ahead of Take-Two Interactive, CD Projekt, and Ubisoft. The company is enjoying some nice tailwinds. Its video games are seeing record high engagement, and the gaming sector overall is reporting record sales as consumers flock to digital entertainment during the pandemic. The company’s strong release slate, full of new installments of popular franchises like FIFA 21 and Madden, is driving growth.

The company develops and publishes games and services across various genres, such as sports, first-person shooter, action, role-playing, and simulation primarily under the Battlefield, The Sims, Apex Legends, Need for Speed, and Plants v. Zombies brands; and license games from others, including FIFA, Madden NFL, and Star Wars brands.

Current position – Financial Performance and Future Growth Prospects

Electronic Arts, popularly known as EA, distributes its gaming content and services through multiple distribution channels as well as directly to consumers (online and wirelessly) through its online portals — Origin and Play4Free.

EA games can be played on video consoles, personal computers, mobile devices, tablets and electronic readers. The company generates revenues from the sale of disk-based video game products (known s packaged goods), downloadable contents (DLCs), subscription, micro-transactions and advertising.

EA has been the primary beneficiary of the ongoing shift from physical to digital versions of video games. Notably, contribution of the digital business to EA’s revenues increased from 57% in fiscal 2017 to 67% in fiscal 2018 and 75% in fiscal 2019. The company expects the digital business to continue to grow primarily on the back of live services and a strong mobile business. Moreover, compared with the physical platform, digital games are more profitable due to minimum packaging cost. In addition, the company’s freemium and extra content services are generating significant market traction, which is driving the top line.

The financial performance of EA during the fiscal 2021 first quarter (ended June 30) was absolutely spectacular, as net revenue increased 21% to $1.46 billion. During the investor call, COO and CFO Blake Jorgensen said the company added “tens of millions of new players” to its network and launched new releases during the quarter. As a result, Electronic Arts raised its full-year net revenue and net bookings guidance to $5.625 billion and $5.950 billion, respectively.

Electronic Arts Inc. has always been a company that focuses a great deal of its attention towards finding ways to accelerate its growth numbers. The best and most efficient way of doing that is by improving the gameplay of each individual game they make and to also increase they product offering, so that they could appeal to a larger audience. As the variety of live entertainment options such as live sports and concerts remain limited due to COVID-19, people will look to video games as an alternative. Jorgensen noted in the first-quarter earnings release, “Our Stay Home, Play Together initiatives have been a strong tailwind for the business, as players look for safe and social entertainment in these difficult times.”

EA’s latest battle royale (BR) game — Apex Legends — is an instant hit. The game has smashed the records of Epic Game’s Fortnite in this genre. The company is in talks with Tencent to bring the game to China. Notably, EA lacks significant presence in China apart from FIFA and a few mobile games. Thus, Apex Legends will boost EA’s footprint in China’s PC-gaming market, which is a positive.

EA’s strong liquidity and cash flow-generating ability make the stock attractive to investors. As of Jun 30, 2020, the company had $5.9 billion in cash and short-term investments compared with $5.7 billion as of Mar 31, 2020. In comparison, EA had $1 billion senior notes as of Jun 30, 2020, with $600 million maturing in March 2021 and $400 million due in 2026.

With a PE of just 19, Electronic Arts boasts an enticingly low valuation — especially compared to comparable video game companies like Activision Blizzard, which trades at 34 times earnings. As mentioned above, Electronic Arts will likelycontinue to benefit from elevated demand for stay-at-home entertainment amid the coronavirus pandemic, as well as from its partnership with Valve to release titles on the Steam PC gaming marketplace.

Electronic Arts’ net sales jumped 20.7% to $1.46 billion in the fiscal first quarter. And management is guiding for full-year revenue of $5.63 billion — representing a 1.6% gain over the prior-year period. Electronic Arts is mature, and investors shouldn’t expect breakneck revenue growth going forward. But the company’s consistent profits and low valuation make it an excellent way to bet on a strong industry at an affordable price.

Technical Analysis

The stock is currently sitting at the $142 mark after rebounding from the strong psychological and horizontal support at $110 earlier in November. We recommended the stock in mid-October at $124.50, which ended up being right in the middle of the later established price range for the stock of $110-144. The initial downward correction was anticipated back in late October as nothing can go up or down in a straight line forever and after the strong 7-month long bullish rally following the horrendous price declines in March, it was more than normal to see a downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks – COVID-19, the effect of the outcome of the US presidential elections, the economic recovery, Brexit etc. – and that we could be in for a sideways and choppy price action in the coming months, our analysis shows that the winners will continue to win. We are strongly bullish on the EA’s stock and believe that any profit-taking corrections would give us a great opportunity to buy the stock at a good discount. This, in turn would give us a chance to maximize our profits to the upside, once the stock resumes its strong uptrend. Furthermore, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing that the price might not have enough steam to break the current diagonal trendline resistances that it faces on its first attempt. The exhaustion of the recent up move could be signaling that a potential short-term decline could be just around the corner. Thus, we are not advising our followers to go ahead and start buying the stock right now as the stock is facing a serious resistance at its current highs. Instead we believe that the but to rather wait for a better entry point that we believe will present itself in the coming days and weeks.

We would wait for a short-term pullback towards the $135 mark and start buying just above the support at $134. Should the price drop further, we would be interested in adding more to our buy positions at the $125 and $115 levels, which would improve our average cost basis. Our first take-profit target would be set at $145, followed by the next target at $165 where we would be fully cashing in our profits.

Additionally, we should always remember that the XLC and XLK share a very strong 10-year positive correlation of 90%, which following DowExpert’s investment philosophy means that if one of the two ETFs issues a signal there is a 90% probability that the other ETF will follow suit. Thus, we believe that the broad economic weakness in the US and the uncertainty surrounding the process of recovering to pre-COVID-19 levels in terms of productivity, job creation, consumer spending and inflation, will be the driving fundamental forces behind the expected short-term market declines in the coming days and weeks. As a result of that, we expect EA’ s stock to move slightly lower in the coming weeks with an initial downside target at the $134 level and a secondary target at $124 before resuming its stronger long-term uptrend. However, considering the solid fundamentals, dominant market position, and a great market edge this should be treated as a great long-term buying opportunity by our followers.

We at Dow Experts enjoy analyzing the market and helping our followers maximize their profitability by following our trading and investing ideas, which are always supported by our rational investment approach.


Sincerely,

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