Intel Corporation (NASDAQ:INTC) has experienced a great deal of turmoil in recent weeks. With the revelation of the security holes now known as Meltdown and Spectre, the reputation of Intel, and by extension INTC stock, has suffered. The full impact of the security flaw has yet to be felt.
However, companies make mistakes, and in the end, Spectre and Meltdown will likely not melt down INTC stock in the long term.
Nobody argues that this flaw has caused a great deal of embarrassment. The company spent decades as the leader in the PC industry. Due to its reputation for producing high-quality processors, many forgot the company had Advanced Micro Devices, Inc. (NASDAQ:AMD) as a competitor.
The fact that the flaws also affect AMD shows this was not just an Intel problem. Moreover, several factors will soften the impact of this defect, and ultimately help Intel stock.
INTC Concerns Are Overblown
First, the flaw could increase PC sales for Intel. Since PCs have become even more of a business tool in recent years, demand will be high for secure PCs that have not been affected by the flaw.
Some fear had spread that the security patch from Microsoft Corporation (NASDAQ:MSFT) would either fail or slow down PCs. Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) reported no measurable performance declines from the patch.
This doesn’t mean that companies such as International Business Machines Corp. (NYSE:IBM), Qualcomm, Inc. (NASDAQ:QCOM), and NVIDIA Corporation (NASDAQ:NVDA) won’t try to gain a competitive edge from this public relations crisis. Still, if the flaw induces any upgrade cycle, INTC will likely benefit.
Second, as many of my colleagues have mentioned, Intel merely has become the latest major company to face quality issues. Security issues with Equifax Inc. (NYSE:EFX) and repeated food scares at Chipotle Mexican Grill, Inc. (NYSE:CMG) have only created temporary stock selloffs in both companies.
And back in the 1990s and early 2000s, Microsoft experienced repeated complaints about Windows security flaws and sometimes even the usability of the operating system itself. Microsoft stock survived and thrived during this time and trades near record highs today.
Third, unlike MSFT stock, INTC trades lower than its recent highs. The stock traded at a low price-to-earnings (PE) ratio when investors thought of Spectre as a James Bond movie. Now that Wall Street knows Spectre as a security flaw, that PE ratio has fallen to about 15.5.
Although analysts expect slow profit growth in the near future, INTC sells well under the current S&P 500 average PE of 25.
Insider Selling in INTC Stock Adds to the Uncertainty
In my opinion, Intel’s biggest long-term danger from the security flaw may be direct effects on top management. An SEC investigation related to CEO Brian Krzanich’s stock sale right before the public found out about Spectre and Meltdown could prolong the public relations pain. Our own Dana Blankenhorn believes Intel should fire Krzanich.
Whatever happens, a change in the CEO position would have a negative but likely short-term impact on the stock. The move away from PCs to data centers, self-driving cars, and other high-growth areas occurred under Krzanich’s tenure. Given the revival in INTC stock, any possible successor would likely keep the company on the same course.
Intel will report earnings for its 4Q 2017 earnings on Jan, 25. On this date, investors should gain more visibility on the cost of fixing the flaw and possibly other effects as well.
Final thoughts on INTC stock
The Spectre and Meltdown security flaws, while embarrassing, should have little long-term impact on INTC stock. Investors should note that processors made by its arch-rival AMD also felt an impact from the security holes.
Also, Wall Street should remember that its long-time partner Microsoft dealt with repeated revelations of security flaws and now trades at all-time highs.
Mr. Krzanich’s stock sales right before the security flaw went public bring about concerns that could end his tenure. Still, no matter what happens to Mr. Krzanich, he’s already set a path that will greatly reduce Intel’s dependence on PC sales.
Moreover, INTC stock, which was inexpensive before the news, now trades at an even lower valuation. Hence, the uncertainty facing Intel creates a great opportunity to buy INTC at a deep discount.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.