The owners of Intel Corporation (NASDAQ: INTC) stock cannot be happy. INTC stock benefited from the stock-market rally from January to April, but the climb of Intel stock price ended when the company admitted it faced major challenges ahead. What exactly caused Intel to cut both its second-quarter and full-year guidance?
Intel forecast Q2 revenue of $15.6 billion, compared to analysts’ consensus estimate of $16.88 billion. Its Q2 EPS guidance of 89 cents missed the average outlook of $1.02. Based on analysts’ consensus 2019 EPS estimate of $4.35, INTC stock trades at 9.9 times forward earnings.
Unsurprisingly, in the wake of the company’s guidance miss, Intel stock has dropped 26% from its 52-week high of $59.59. The company expects its revenue from its data center, non-volatile memory, and programmable solutions businesses to miss consensus estimates. Conversely, its client computing and IoT business will beat analysts’ average estimates.
Also on the positive side, weaker desktop unit sales did not stop Intel from beating consensus first-quarter estimates. Even though its notebook unit sales fell 7% year-over- year, its average sales price rose 13%. But given the company’s guidance, Intel’s management may believe it faces higher competitive pressures from Advanced Micro Devices (NASDAQ: AMD).
With Intel falling further behind technologically, expect AMD to take more of Intel’s market share. Intel’s decision to delay production of its 10nm chip is a serious blow to Intel fans who typically buy the company’s latest product.
After AMD announced that it would unveil 7nm CPUs, loyal Intel customers may no longer excuse Intel for its delays. AMD also talked about its Frontier supercomputer, which will be available in 2021 and will be powered by Zen 2 CPUs on 7nm and Navi GPU parts. As a result, going forward, Intel needs something better than its current Cascade Lake, 56-core/112 thread solution.
In the near-term, Intel might luck out, as AMD is forecasting lower unit sales due to a softer market. AMD must also raise its R&D spending and has limited marketing resources available to promote its newest products. Those factors could delay Intel’s market-share erosion, but not for very long.
A security flaw in almost all of Intel’s chips manufactured since 2011, called Zombieload, is another negative development the company does not need. The fix will slow Intel’s consumer chips by up to 3% and cause its data-center chips to become up to 9% slower. Even though the performance slowdown is noticeable only when working on heavy I/O tasks, consumers and enterprises may seriously consider AMD chips from this point forward.
According to Tipranks, 29 analysts have, on average, a $52 price target on Intel stock. The bullishness is questionable because ten analysts rate Intel a “buy” but 12 rank the stock a “hold.” To get to the average price target, Intel needs to first work through the inventory correction of its Enterprise and Government units. Selling more higher priced i5 and i7 chips will offset PC supply constraints. Continuing to find ways to get back on schedule with the 10nm chip ramp will restore confidence in the company and in INTC stock.
Investors who are holding Intel stock get to collect its 2.5% dividend yield while waiting for Intel stock price to slowly recover. At 10.1 times earnings, the market has priced in an expected slowdown in chip demand. By comparison, AMD shares trades at over 100 times its earnings over the past 12 months and 28.5 times analysts’ consensus forward earnings estimate. NVIDIA Corporation (NASDAQ: NVDA), which obtains most of its profits from graphics process but is facing slower data center revenue, trades at a 30 times P/E.
Intel stock fell too far, too fast and is now in value territory. The company failed to execute on its 10nm product road map and the market is punishing it. Yet the chip giant still has a big R&D and marketing budget at its disposal. It still has time to minimize the oncoming competition from AMD. but it needs to work more quickly to meet its objectives. If that happens, INTC stock could get back to the $50 range, and the market will reward it with a higher P/E multiple.
As of this writing, the author did not hold a position in any of the aforementioned securities.