Intel Corporation (Nasdaq: INTC) has long been king of the hill in the global semiconductor market, but signs of wear and tear have become noticeable. Chief rivals like Samsung and Advanced Micro Devices ( AMD)…
Intel Corporation (Nasdaq: INTC) has long been king of the hill in the global semiconductor market, but signs of wear and tear have become noticeable.
Chief rivals like Samsung and Advanced Micro Devices ( AMD) have capitalized on Intel’s foot-dragging on its next generation 10-nanometer microchip, with both companies rolling out their own lower-cost, higher-performing chips before Intel joins the club.
That foot-dragging could be a problem for both Intel and its shareholders.
“Make no mistake, Intel is going to have to fix this and it will take many, many, many years,” Hans Mosesmann, a technology analyst at Rosenblatt Securities, told CNBC in an interview. “Their process technology disadvantage, which I think is broken, will take five, six, seven years. I don’t think that business model works by them being behind by a year or two in terms of process technology.”
Couple that issue with an ongoing search to replace former chief executive officer Brian Krzanich, and Intel has a lot on its plate heading into the last quarter of 2019 and beyond.
The good news for Intel investors is that earnings are up, with adjusted second-quarter earnings climbing 44 percent to reach $1.04 per share in July. Additionally, Intel’s revenues rose by 15 percent to $16.96 billion, a quarterly revenue high benchmark for the company.
Should investors take a bite of the Intel apple, or keep their distance? Market experts are leaning toward the latter move.
INTC stock at a glance. Intel stock price has been on a roller-coaster ride through 2018 after years of robust growth.
The stock is trading at about $45 per share, and is up more than 90 percent since 2013. INTC stock rose steadily through the first five months of the year, cresting to $57 in early June before concerns over Intel’s next-generation chip issues mounted.
INTC’s one-year consensus target estimate of $56 leaves modest room for growth in a semiconductor sector that has significantly outperformed the S&P 500 in the past five years, to the tune of 176 percent versus 76 percent. Rival AMD, on the other hand, has seen its share price double in 2018 as the California-based company grabs more market share from Intel. In fact, AMD tops the list of S&P 500 performers, as its share price is up 195 percent in 2018.
“Intel has delayed the move to 10-nanometer chips and several companies have already announced seven-nanometer technology, so Intel risks getting leapfrogged here,” says Carter Smyth, practice manager with Silicon Valley Software Group, a technology consultancy that helps innovate with emerging technologies. “This delay could present manufacturing bottlenecks and accounting issues that may take a year to be reflected in financial statements.”
There are plenty of other tailwinds for Intel with the continuing growth of cloud computing.
“There could be a lot of innovation in semiconductor technology the public doesn’t know about, but that is based on the delayed 10-nanometer chip process,” Smyth says. “There is arguably potential for customization business to create proprietary silicon to optimize specific services for the large cloud providers.”
“With some further clarification of strategy and finding the right leader, Intel could be compelling again,” he added.
Pros to buying Intel stock. Investment professionals aren’t exactly bullish on INTC these days, although Intel does have a good growth story to tell.
“We think the stock is in a holding pattern given the lack of a permanent CEO leaving a leadership void as well as delays in the rollout of 10-nanometer linewidths,” says Sean Kraus, senior vice president and portfolio manager at Whittier Trust. “These issues have overshadowed relatively strong second quarter financial results driven by 27 percent growth in data center revenues. Valuation is also historically inexpensive.”
One upside is that INTC is trading at five-year lows, making the stock a decent value proposition, especially in the booming semiconductor sector.
“As an investor, I will hold or buy Intel now, based on its P/E ratio, dividend yield and potential for growing,” says Tenpao Lee, professor of economics at Niagara University in New York. “For starters, the demand for computer chips will ensure the existence of Intel. The key for Intel is it needs to maintain a competitive edge over its peers and it needs to deal with its business cycles.”
In the past, “Intel inside” was very successful, but in recent years, global competition has tarnished the Intel brand, Lee says.
“Even though the performance of Intel’s stock was lagging until the second half of 2017 and again in the third quarter of 2018, the probability for Intel to outperform its competitors from China is good, and the business cycle may move to a positive territory soon,” he says. “Consequently, I recommend buying or holding Intel for the time being,” Lee says.
Cons to buying Intel stock. Intel seems to be getting outmaneuvered by competitors, and it’s starting to show up in the company’s stock price.
“It seems like Intel is an aging superpower fighting a traditional war against legions of competitors using asymmetrical and guerrilla tactics,” Smyth says. “They continue fighting a gigahertz war with one-chip-fits-all solutions, whereas competitors are beating them at power consumption, chip scaling and special purpose processors that better target high-growth areas”
Plus, there are signs that the semiconductor sector is overheating.
“The semiconductor market is a cyclical one and a variety of indicators are flashing red, like reduction of lead times and buildup of inventory,” Smyth says. “The sector has outperformed the market for several years, but is now richly valued with a sector price-to-earnings ratio of 36. For those who are not already invested in the sector, the risk-to-reward ratio is quite poor to start investing now.”
The “missing CEO” issue isn’t helping matters, either, although an interim CEO has been named by Intel’s board.
“We hold an underweight position in Intel at this time in select portfolios,” Kraus says. “We cannot add to the name without knowledge of who will lead the company as CEO. This choice requires both someone highly talented at both big-picture company strategy as well as manufacturing to focus on the line width issue. Valuation is cheap reflecting this issue.”
The bottom line on INTC stock. Until the new permanent leadership is announced or progress is made concerning the line width transition, INTC is in “hands-off” mode, market experts say.
“We think Intel treads water,” Kraus says. “Given a relatively cheap valuation, downside is likely limited, but there are other names in the sector like Nvidia ( NVDA) that are clear winners going into year-end, with multiple drivers of top-line growth.”