Intel Corporation (NASDAQ:INTC) stock is trying to claw back some of the ground lost earlier this year, when two key design flaws affecting Intel CPUs were discovered. INTC stock already had pulled back modestly from a 17-year high above $47 reached in mid-December.
INTC stock then fell another 9% between Jan. 2 and Jan. 10, before recapturing nearly half of those losses over the past few sessions.
I wrote at the time the bugs were disclosed that the flaws – now known as Meltdown and Spectre – were a real problem for Intel stock. Two weeks later, that’s still the case. The flaws are both widespread and structural.
While software providers like Microsoft Corporation (NASDAQ:MSFT) and Oracle Corporation (NYSE:ORCL) have issued patches, those patches have a significant impact on performance. And fixing the flaws in new processors seems likely to be a multi-month, if not multi-year, process.
Admittedly, there’s an argument that the decline presents a buying opportunity in INTC stock. Luke Lango made such a case on this site just last week. The performance hits related to the patches don’t appear to be that severe.
Rival Advanced Micro Devices, Inc. (NASDAQ:AMD) is vulnerable as well, which should limit any CPU market share erosion for Intel. And INTC stock remains cheap. In fact, I recommended it myself as recently as the end of November.
But the damage to Intel, and to Intel stock, goes beyond the chips themselves. INTC still trades nearly 30% higher than it did in August. And long-term growth concerns persist in CPUs and beyond.
If Meltdown and Spectre have a long-term impact, and I believe they will, the bull case for Intel stock has taken a significant hit.
The Impact on Intel’s CPU Business
There’s a case that the negative effects on INTC stock from the flaws should be muted, at worst. In terms of the flaws themselves, the direct impact should be relatively limited. Intel is worth $200 billion, after all.
It would take a massive direct cost, something along the lines of a multi-million-unit recall, to have a noticeable impact on that valuation. And, in many cases, the performance hit from security patches seems relatively minor, as Lango pointed out last week.
In terms of performance, older CPUs have shown more significant effects from patches, as Forbes detailed this week. That could actually help Intel in the near term, as frustrated consumers with formerly “good enough” PCs instead decide to trade up to newer models.
But what concerns me the most here are the indirect impacts. AMD long has been seen as the clear second-place entrant in CPUs. It’s spent the last couple of years working aggressively to narrow the gap with Intel, notably with its new Ryzen line.
While AMD has some vulnerability to the flaws, its exposure so far appears to be far more limited. And the major flaws in Intel chips on their own potentially change the competitive narrative. AMD stock has responded in kind, rising 18% so far this year against a 4% decline for Intel stock.
Remember that Intel pioneered the very idea of marketing a semiconductor with its “Intel Inside” campaign. But if, in the mind of consumers, the Intel brand becomes associated with a confusing, scary, widespread design flaw, that branding effort could rebound against the company.
That gives AMD a leg up, and could even send some consumers to Apple Inc. (NASDAQ:AAPL) products.
And in the basically zero-growth (at best) PC business, Intel simply can’t afford to lose market share.
Data Center Effects
An equally large concern is in Intel’s data center business. There, the company has been trying to hold off Nvidia Corporation (NASDAQ:NVDA), which is threatening Intel’s near-monopoly on the space.
Nvidia stock, too, has gained on the news, rising 15% YTD. Again, the risk of a reputational hit to Intel seems rather high. Whether Intel’s chips are fixable in the near term, there’s a long-term design flaw that won’t just be fixed in a matter of weeks.
It’s a marketing gold mine for Nvidia as it tries to convince customers to defect from long-dominant Intel.
If both CPUs and datacenter take a hit, Intel doesn’t have enough elsewhere to fall back on. That combination probably means Intel’s revenue (estimated to rise less than 3% this year, per Street consensus) starts to decline. And even a ‘cheap’ sub-14x forward EPS multiple doesn’t account for that type of pressure.
INTC Stock Looks Dangerous
From a broader standpoint, the Meltdown/Spectre issue also hurts the narrative surrounding Intel stock. INTC stock was languishing in the 30s just a few months. And it was precisely the fear of share gains from both Nvidia and AMD that drove investor skepticism.
Meanwhile, CEO Brian Krzanich sold the majority of his stock after being informed of the flaw, which raises leadership questions. Dana Blankenhorn argued that Krzanich should be fired immediately for that decision.
I’m not quite that aggressive. But it’s worth pointing out that Krzanich’s sales – even ignoring the questionable timing – moved the CEO to the absolute minimum holding required by the company. That’s hardly a vote of confidence in Intel stock from its leader.
What worries me about INTC stock as 2018 plays out is that I’m not sure from where a vote of confidence is supposed to come. Performance issues will be dissected for months. Intel will have to spend the year redesigning future chips.
AMD and Nvidia will be aggressively highlighting the flaws, and Intel’s reaction, at every turn.
For a company whose growth prospects already seem limited, a lot of risk seems to have been added. And with the stock still up 30% in less than a year, that risk just doesn’t look worth taking.
As of this writing, Vince Martin has no positions in any securities mentioned.