Smart Money Avoiding INTC
RBC Capital Markets recently downgraded the chip giant from “outperform” to “sector perform” with a lowered target of $26 a share instead of $27.
That comes after Cannacord Genuity put a $22 target on shares with a “hold” rating after INTC lowered its guidance at an analyst event.
These moves are a reflection of broader sentiment around Intel stock — not that the company will crash, but just that the best days of INTC might be behind it.
To me, the most telling sign of decline isn’t the stagnant revenue or the lowered guidance. These are symptoms of a bigger shift in the business — namely, that Intel is making more chips for other chip designers instead of producing its own designs.
So-called “fabless” companies make their money creating innovative chip specs, then simply outsourcing the production to other facilities. And while Intel has long been reluctant to team up with rivals that compete with it on the design front, the fact that it is running under capacity and the need to create more revenue has led INTC to new foundry partnerships — even if that means producing the chips that gadget companies preferred over Intel’s own.
This is the root cause of lower margins, revenue and momentum for Intel stock.
Now, Intel still has a scale that’s unmatched in semiconductors and is the No. 1 foundry in the world. And it’s also worth noting that with a forward P/E of about 12, INTC boasts a low earnings multiple compared with many other tech issues these days.
But that might be because growth will be very hard to come by given the shift to lower-margin fabrication instead of design and innovation.
After all, the new CEO of Intel, Brian Krzanich, is widely regarded as a manufacturing expert first and foremost. It’s logical for many investors to see this as a nod to Intel’s future as a manufacturer of chips more than a designer of chips.
There’s nothing wrong with that, since semiconductor fabrication is a reliable business — and one that will continue to support a robust and stable dividend for Intel as the company cranks out all manner of electronic components for an increasingly high-tech world.
However, home-grown chips have the biggest margins. And if INTC is simply going to rely on other people’s good ideas to get ahead … well, investors will have to seriously adjust their expectations for the stock.
Because a name that was once synonymous with the computer biz will be very much beholden to the new tech leaders in 2014.
In stark contrast to its famous “Intel Inside” campaigns, INTC is going to be on the outside looking in for some time.
More on INTC Stock
- More details on Intel’s mobile chip dilemma. (The Exchange via Yahoo Finance)
- Check out the dividend history of INTC stock. (Nasdaq)
- Intel is at least still up 20% YTD in 2013, making it one of the better stocks in our annual contest. (10 Best Stocks for 2013)
- FWIW, Intel keeps pushing mobile as its future. (MarketWatch)
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.