138% Return With This Intel Trade

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Yesterday, Intel Corp (INTC) held its first investor day in two years. The company has been under fire the whole time since its last. Yesterday was no exception.

Many investors hold shares of Intel for its 50-year history, its leading innovation and its growing dividend. But those last two have been a bit scarier than those investors are used to.

On innovation, the company has clearly fallen behind its competitors in the PC space. Once a dominator with more than 50% of market share, it’s long-delayed launch of its 10-nanometer chip architecture has accelerated its fall to less than 30% of the market.

Its dividend has not been cut. But it hasn’t been a straightforward path higher either. Three times over the last decade, Intel has decided to not increase its quarterly payment when investors felt it should. So, for those looking for a solid, growing dividend, there are other avenues to take.

The main reason behind those awkward dividend announcements was the flatlining of Intel’s core business. With alternatives out there, primarily from rival AMD, PC makers have more choices than ever.

So, entering yesterday’s investor meeting, many had questions. And Intel did a solid job of answering them, no matter how tough.

The 10-nm chip will be released this year, by the holiday season. That’s something the company has been shooting for and investors wary of. For servers, this new chip will be available in the first half of next year. Not quite the answer investors wanted, but they could deal with that.

The real problem came in the very next sentence. The 7-nm technology its rivals have already launched, won’t be out until 2021.

Now, for investors, that sounds terrible. Falling years behind the likes of AMD is awful for a tech company. The most important factor in the tech world, after all, is first-to-market products. But that doesn’t tell the whole tale.

Intel’s 7-nm chip will be a jump ahead of AMD’s. It would be more comparable to a 5-nm version of the competitor’s. And Intel’s 10-nm is in line with AMD’s current 7-nm one.

The company announced that there will be several versions of the new chips to serve different purposes. And that brings us to the main topic of the meeting… the long-awaited transition plan from PC to data and next-gen infrastructure.

It’s clear that Intel’s place as the leader in PC chips is falling. Oh, it still holds a giant portion of the market… and it will remain important for sales and earnings for years to come. But for the company to make its next evolution, it needed to adapt its strategy around today’s tech world.

Artificial intelligence, automation, 5G, and the Internet of Things are all what will make or break Intel. And it did a pretty good job showing investors how it’ll get there.

It will invest heavily in adaptive chips to work with these new fields. It is making a complete transition to 5G design, though that’ll be a harder slog with its competition. And it intends to be a leader in A.I. platforms. It’s market leadership position in data does make that a compelling case.

In total, it plans to see its revenues go 70%-PC/30%-Data to 30%-PC/70%-Data. With Intel’s enormous size, that transition would be impressive… and potentially lifesaving.

It expects continued single-digit growth as it ramps up its new business model and the launches of its next-gen chips. Intel is also looking to grow its free cash flow and conserve what it can on the spending side. That speaks to dividend seekers.

Yet, if you know anything about Wall Street, big multi-year plans like this one doesn’t cut it. The company’s frank guidance and answers still didn’t please investors. Shares of Intel are down nearly 6% on the day.

Of course, that only opens up new investments in the company. Considering Intel is still looking at about $4.30 in earnings per share for 2019, that gives it a forward price to earnings ratio of just 10.8. That’s ridiculously low.

Investors aren’t selling because of the facts. They are selling because they are impatient. Right now, Intel is valued at one-quarter its main competitor AMD.

By the end of this year, their technologies will be evenly matched. Yet, because Intel hasn’t gotten there yet, it has taken a beating. Just look at what the last month has been like for INTC shares:

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This presents us with a unique opportunity. You see, Intel can attract big time investors. They always jump in after a short-term fall. And this time will be no different. Despite a downgrade following yesterday’s call, a BMO Capital Markets analyst still gave it a target price of $50 – above its current price. So, if analysts – the same ones leading this selloff – believe Intel is still undervalued, there’s something there.

We aren’t suggesting that Intel is set to rocket higher. It likely won’t until we see what exactly its year-end launch will mean in terms of sales and profit margins. But a bounce at these prices is more than likely.

So, should you go out and buy shares of Intel? Maybe… but there’s a better way to play this specific situation.

1ort Term Bulls

A bull call spread is a type of options trade that involves buying a call on a stock you believe will go up in price and selling a second call with a higher strike price.

This let’s you profit as shares rally up to a point, but your cost is drastically offset by the premium received from that second call.

You can see how this works here.


Source: The Options Industry Council

The trade off for the cost reduction is any profit over the strike price of the sold call. So, while your cost is reduced, the maximum profit potential is also capped.

For a stock like Intel that is far from likely to shoot straight up from here, this is the best way to play a bounce.

Let’s look at a specific trade…

A Specific Trade in INTC

Right now, traders can buy a July 19 $46 call for $2.66 per share and sell a July 19 $50 call for $0.98 per share for a net debit of $1.68 per share. Since each represent 100 shares of INTC, that’s a total cost of $168.

That’s the most the trader could possibly lose on this deal. But that’s not likely. As noted, shares would have to remain in the dumps for quite a while for this trade to go south. In fact, this trade doesn’t expire for more than two months, giving the stock plenty of time to bounce back.

To find just how much the trader could make in that event, take the difference in strike prices ($50 – $46 = $4), and subtract the cost ($4 – $1.68 = $2.32). On 100 shares, that’s a potential profit of $232.

That works out to a 138% potential profit on the amount at risk. Intel is poised to bounce back after today’s selloff – some of which had nothing to do with Intel, as the market itself has been in selloff mode. So, the possibility of a 138% return is definitely on the table.

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