If a trade war breaks out, the first casualty could be Intel Corporation (NASDAQ:INTC), something that might be hard to fathom, considering INTC stock’s 45% gain over the past six months.
While most analysts will tell you it’s companies like Walmart Inc (NASDAQ:WMT) — with their imports of cheap clothes and electronics — that will suffer from a trade war, chip companies like Intel that could suffer most, especially if China is the target.
That’s because Intel operates in five Chinese cities, with manufacturing in Dalian and Shanghai, assembly in Chengdu, and three separate marketing offices. Just this month INTC signed a deal to build 3-D memory chips there. Its ties to China are deep, an investment of $1.5 billion.
Semiconductors are a global industry and have been for decades. Their manufacture creates enormous pollution and requires a lot of highly skilled labor. It’s also very competitive, so chip companies have long sought politically stable, lowest-cost locations with the weakest environmental laws, to set up their plants.
So, yes, Intel is vulnerable to a trade war.
Times Should Be Better
Meanwhile, U.S. tax cuts and global growth have been very, very good for Intel. The INTC stock is up more than 11% this year, compared with the Nasdaq Composite Index’s 7.2% gain; the shares opened for trade March 6 above $50 per share. The price to earnings ratio that day was a very reasonable 16, and the 30 cents a share dividend yielded 2.37%. It is now trading at its highest level since the end of the 20th century tech bubble.
After stalling in the middle of the decade, Intel is growing again. Revenue for 2017 was 5.6% higher than in 2017, at $62.8 billion. Operating income came in at $17.3 billion, and barely a third of the $3.10 per share in earnings went to dividends. The company ended the year with $14 billion in the bank, and the nearly $4.5 billion it took on in added debt during the year barely budged the debt-to-asset ratio, because assets rose over $10 billion.
Chip fabrication is enormously expensive. It is subject to what I call Moore’s Second Law: Costs rise with each new generation of fabrication equipment. As a result there are only four big microprocessor producers left — Intel, privately owned Global Foundries, Samsung Electronics Co Ltd, and Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM). Everyone else is “fab-less,” meaning they need someone else to do their manufacturing. It’s a nice position to be in.
The Spectre of Bad News
But all is not right with Intel’s world.
The mis-handling of the Meltdown and Spectre bugs led me to call for the sacking of CEO Brian Krzanich. He’s still there, despite growing pressure on him from other quarters. Our Ian Bezek, however, has taken his profits and walked away.
While Intel has been growing, Samsung has been growing faster, and recently passed it in semiconductor revenue. Intel’s response has been to get closer to China. Hmmm… How’s that working out?
The Bottom Line on Intel Stock
My view is different. This is a company in crisis, and a trade war will only make matters worse. Intel is tied to China hip-and-thigh and will be among the companies hardest hit in a trade war. Its CEO is under a cloud over insider trading, and it now faces liability for problems that go back nearly 20 years.
Why would I buy INTC stock, especially as the market falls and other tech companies get cheaper?
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares companies mentioned in this story.