It’s been a September to remember for semiconductor stocks, with the some of the biggest names in the sector seeing huge rebound gains in the month. Industry leaders such as Applied Materials (NASDAQ: AMAT), Broadcom (NASDAQ: BRCM) and Texas Instruments (NYSE: TXN) all enjoyed sizeable monthly gains. Of course, when you’re talking semis, the biggest and baddest dude on the block is Intel Corp. (NASDAQ: INTC).
The semiconductor giant and Dow component logged a most-impressive +9% gain in September, making a strong comeback off a horrendous August that saw the stock plunge to a new 52-week low. As you might expect, there are good reasons arguing in favor of Intel’s continued run. Yet there also are strong reasons to think the shares are just semi-sweet here, and ultimately, headed lower.
Here are the pros and cons of Intel stock.
Reasons to Buy INTC Stock
‘Best quarter in the company’s 42-year history.’ In July, Intel reported blowout Q2 earnings that CEO Paul Otellini called, “the best quarter in the company’s 42-year history.” That bold statement was validated by the numbers, as Intel’s revenue rose +34% year-over-year to $10.8 billion. Intel also came in with a profit of 51 cents per share, way above the 18 cents per share the company had in the same quarter a year ago. Both revenue and earnings smashed past analysts’ forecasts. Otellini told analysts that he was particularly excited about a new line of processors that will be launched later this year. The company put its wallet where its excitement is. Intel raised its capital-spending budget for the year by $400 million, to $5.2 billion, to ramp up production capacity to meet expected demand for the new chips, code-named “Sandy Bridge.”
A tech-stock dividend play. When you have a stock like Intel that’s capable of experiencing such a big spike higher, you don’t normally equate it with a steady dividend performer. Yet that’s just what Intel is. The company pays a hefty 63 cents per share annual dividend. At the current share price that translates into a very attractive annual yield of 3.30%.
Strong technical buying. Take one look at the chart here of INTC and you get the unambiguous sense that the bulls have found their favorite grazing spot. Intel shares just breached their short-term, 50-day moving average and now they appear to be on their way toward breaking back above the technically significant 200-day moving average. If INTC shares can break the 200-day moving average, it could clear the way for an even bigger bull move.
Cons
Too far, too fast. Although the technical buying of late in INTC stock has been impressive, the stock may have risen too far, too fast. The stock has a lot of overhead supply in the low $20 range, and that could put some serious pressure on any continued upward momentum.
Analyst sours on the sector. Perhaps the biggest con facing Intel is the likelihood of a significant slowdown in the semiconductor space going forward. On Friday, Oct. 1, Bernstein Research cut its estimates for Intel and fellow chipmaker Advanced Micro Devices (NYSE: AMD), citing “a Q3 notebook PC environment below our prior (already reduced) expectations.” Bernstein now estimates Intel’s 2010 EPS will be just $1.92, down from the original estimate of $1.98. For 2011, the firm says EPS will fall to $1.86.
The chip party’s over. The Bernstein downgrade comes on the heels of some high-profile research on the semiconductor sector suggesting that the party for chipmakers is indeed coming to an end. According to the ChangeWave Alliance Research Network’s latest corporate quarterly spending survey, the semiconductor sector is taking a major hit in Q3. After five consecutive quarters of positive momentum, there’s been a big downturn in third-quarter sales growth, product inventories and pricing power. Moreover, the fourth-quarter sales pipeline results point to further challenges ahead.
Confirming this downbeat research on the chip sector is market research firm iSuppli, which just cut its 2010 semiconductor industry revenue growth forecast to 32%, down from 35.1%. According to iSuppli, revenue in the fourth quarter will be lower by 0.3% from the third quarter. That represents the first sequential decrease since the Great Recession period of Q4, 2008 and Q1 2009.
Verdict
There’s no denying that the smart money has found a winner of late in INTC. However, the stock’s stellar run will likely be hard to replicate in the weeks and months ahead. Also, the earnings metrics in the sector seem to be deteriorating. Given the headwinds Intel faces, the verdict here is in favor of the cons. If you’re a momentum trader that’s willing to sell as soon as the market turns, then it’s probably still safe to play this stock. However, if you’re a longer-term investor looking to get back into tech, you might be better served waiting for an INTC pullback.
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