Despite some negative headlines, Intel Corporation (NASDAQ:INTC) has been on a tear. Since mid-2017, INTC stock has surged 40%. It added to recent gains with blowout quarterly results last Friday.
Much of Intel’s move has been powered by technical developments. Intel, like many tech companies, made a massive move during the dot-com craziness. INTC stock went from $8 in 1996 to as high as $75 in 2000. Shares careened back down to $15 by the end of the tech bust.
Intel stock reliably traded between $20 and $35 for the next 15 years. In late 2017, however, the stock finally broke out, reaching new 17-year-highs. Once INTC stock crossed $40, momentum traders kicked into action, and the stock shot up to $50 in a straight line.
Chip Scandal Hurt INTC Stock
INTC stock gives us a good example in the importance of watching technical trading opportunities. The stock took off not so much on fundamentals, but, rather, because a 15-year chart-basing formation came to fruition. If anything, Intel’s fundamentals have dipped slightly since the stock started its run.
That’s because Intel has gotten embroiled in a scandal. Fellow InvestorPlace contributor Dana Blankenhorn has the scoop. To summarize, Intel’s CEO, Brian Krzanich, sold almost one million shares of INTC stock late last year. This accounted for the majority of his Intel stock holdings. He sold, seemingly, after he learned of Intel’s chip quality problems which date back to as far as 20 years ago. Importantly, however, he sold before Intel notified the public of the flaws in the company’s chips.
Intel appears to have learned about security flaws in its chips last summer. There are two in particular that are troublesome — one which seems to affect most modern PC chips and another that is primarily an Intel-only problem. The “meltdown problem,” which is Intel-specific, requires major code overhauls to repair. These changes could severely impact the performance of Intel chips in Windows and Linux machines. Intel may even need to recall a fair number of chips.
Security breaches are a normal fact of life for tech companies. However, Intel’s handling of this one leaves plenty to be desired. As noted above, Intel took its time in informing the public, while insiders, such as the CEO, had ample opportunity to unload their shares.
Now, INTC stock bulls will make a strong counterargument. Sure, Intel made a major error here and then management compounded it by flubbing its response; however, what will the real long-term consequences be? Advanced Micro Devices, Inc. (NASDAQ:AMD) is still under-capitalized and only marginally profitable. Intel may have caused itself a major public relations scandal here, but it’s not like PC buyers have a lot of other options to switch to.
Going forward, the biggest potential problem may be the server space. In that field, AMD offers a competitive alternative to Intel’s chips. And it appears that the bug fixes may hit Intel’s performance there rather noticeably. Given that servers have powered much of Intel’s recent growth, this could put a damper on 2018 results.
Other Earnings Factors
Of course, there is more to Intel’s outlook than just the security scandal. INTC stock recently hit $50 after all. It got there thanks to robust quarterly earnings. Its core business in PC and mobile continues to underwhelm. Despite increasing market position in Apple Inc. (NASDAQ:AAPL) iPhone modems, its overall sales declined 2% here. This suggests that its PC business is dropping even more quickly.
However, the Data Center Group more than made up for that weakness, with its sales up 20%. The Data Center Group enjoyed robust gains from both communication services and the cloud division. This bolsters the notion that Intel’s strategic growth moves are paying off for the company.
The road ahead will become more difficult for Intel, though. It’s moving heavily into the automotive market and paid a lot (arguably too much) for Mobileye and is making a push for the crown in that space. But heavy competition awaits. Tech giants including NVIDIA Corporation (NASDAQ:NVDA) and Texas Instruments Incorporated (NASDAQ:TXN) won’t give up the auto market without a bitter fight.
Bottom Line on INTC Stock
Intel stock has had a great run over the past quarter. Last time I wrote about it, I told you it was going to $50. Now, here we are, and I’m happy to have taken part in the climb. Even after selling part of my position, I still have a decent holding in INTC stock.
But I’m not expecting any miracles from the company in the near future.
The front half of 2018 is likely to be a slower period for the firm. It faces some competitive pressure in its core chips markets until it resolves the security flaws. Intel’s loss could give AMD some strength in the near term. On top of that, INTC’s management has squandered the market’s trust to some degree. The CEO’s move to dump such a large block of INTC stock reflects particularly poorly on the company’s alignment with its shareholders.
Even putting that aside, INTC stock isn’t as cheap as it used to be. Intel is up to almost 18 times earnings and the formerly 3%+ dividend yield is now down to 2.4%. Neither earnings nor the dividend stream gives you the downside protection you got when INTC stock was at $40. And the security flaws add a short-term, but problematic, headwind for the first half of 2018.
If you’re long Intel, no need to panic, but taking some profits seems prudent.
At the time of this writing, the author owned INTC stock and TXN stock. You can reach him on Twitter at @irbezek.