3 Pros and 3 Cons for Intel Stock

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The bull-versus-bear battle on Intel (NASDAQ:INTC) is very interesting for two reasons. First, in a vacuum, both the bull thesis and bear thesis are founded on sound arguments. Second, due to their respective well-reasoned support, bulls and bears exchanged wins and losses with equal frequency. Therefore, Intel stock has seen its fair share of rallies and selloffs over the past several years.

3 Pros, 3 Cons for Intel Stock

In this article, we will look more deeply at these contrasting arguments. What comprises the bull thesis? What about the bear thesis? Which one is more compelling at the moment?

Without further ado, let’s see the pros and cons for Intel stock:

Pro: Intel Has Secular Growth Exposure

On the positive side, Intel’s core business has broad secular growth exposure to multiple markets. They feature plenty of growth momentum and a long runway to sustain that growth.

Specifically, we have four growth markets here: cloud, data, artificial intelligence and the Internet of Things. Cloud is all about the migration of enterprise workloads from on-premise to cloud solutions, which Intel’s chips power. Only about 20% of enterprise workloads have made such a migration. At scale, that number will rise close to 100%, representing substantial expansion opportunities.

On the data side, everyone and their best friend is starting to collect, store, analyze, and process data. This new world of data analysis requires advanced tools and machines. Here again, Intel technology powers this development. Consequently, as this sector continues to proliferate, Intel’s sales should rise with it.

Additionally, almost every device in the world is becoming “smart” these days. The mainstream emergence of this IoT space translates to greater demand for semiconductor chips which power smart devices.

Last but not least, the world of AI is still in its infancy. However, research is finally starting to turn into real-world solutions. This transformation will continue for the foreseeable future, also implying growing demand for semiconductor chips which underlie AI tech.

Pro: The PC to Data Pivot Has Momentum

The second big pro about Intel stock is that the company is successfully migrating from a PC-centric business to a data-centric business. This pivot more optimally aligns Intel to capitalize on the aforementioned secular growth trends in cloud, data, AI and the IoT.

The chipmaker is the 800-pound gorilla in the global semiconductor market. It got there by being a PC giant. But the PC era is over. Now, all the growth in the semiconductor space is centered around data-related markets. IoT is 100% focused on collecting data. Cloud stores that data, while AI analyzes it. Everything is about data.

Therefore, INTC also made the shift. Better yet, the pivot has worked. The data-centric business today is reporting all-time high numbers, and now accounts for essentially 50% of Intel’s total revenues.

Net-net, the company has successfully changed with the times. It’s now positioned to fully capitalize on today’s biggest secular growth trends.

Pro: Intel Stock Is Dirt Cheap

Another huge positive about INTC stock is that it’s dirt cheap.

INTC stock trades at just 11-times forward earnings. The market average multiple is 16-times forward earnings. Moreover, the average semiconductor stock trades around 14-times forward earnings. INTC’s five average forward-earnings multiple is around 13.

Thus, the Intel stock price presently trades at a 15% discount to its historical norm. Additionally, it trades at a 20%-plus discount to the average semiconductor stock, and a 30%-plus discount to the market.

The conclusion? Intel stock is very cheap, which helps mitigate its risk profile while boosting reward potential.

Con: The Semiconductor Market Is Slowing

On the negative side, INTC is immersed in a semiconductor market that, while having strong long-term growth prospects, is in the midst of a massive slowdown this year.

The semiconductor market is notoriously cyclical. Big up years are followed by big down years, and vice versa. This is mostly the result of fluid supply/demand fundamentals underlying the market. Over the past several years, semiconductors have been red hot. Stoking that fire is robust demand from data-centric end markets against the backdrop of relatively mitigated supply. But production capacity expanded in 2018, and demand has slowed this year amid escalating geopolitical tensions.

The result? Global semiconductor sales dropped 13% year-over-year in the first quarter of 2019. INTC stock is not isolated from this slowdown. Management guided down revenues, margins, and profits for this year.

Con: Intel is Losing Market Share

Another con about INTC stock is that Intel is gradually losing market share to Advanced Micro Devices (NASDAQ:AMD).

Over the course of their multi-decade history of competition, Intel has largely dominated AMD. But once in a blue moon, AMD gets a jump-start on the innovation curve, beats Intel to market with next-gen technology, and steals market share. That is exactly what has been happening for the past year, and what projects to keep happening throughout 2019.

Thus, the outlook for Intel stock in 2019 is for the underlying company to lose share in a shrinking market. That isn’t exactly a recipe for success.

Con: Intel Stock Hasn’t Gone Anywhere in Almost 2 Years

Zooming out, another negative about INTC stock is that shares haven’t really gone anywhere in almost two years.

In November of 2017, the Intel stock price jumped up to $47. Shares have since rallied all the way to $60, and subsequently dropped to $40.

Today, the Intel stock price is $48. Thus, over the past almost two years, INTC hasn’t made any sustainable upward progress.

That’s a long time to go without making a strong move higher. As such, it’s reasonable to question whether Intel the company — much like the equity — is stuck in neutral. If so, INTC stock could be stuck in neutral for a lot longer too.

Bottom Line on INTC Stock

In the big picture, the pros outweigh the cons for Intel stock. The pros here are all about the company’s favorable long-term growth potential. The cons are all about the company’s near-term market and competition headwinds. Eventually, the cons will phase out of the picture, leaving mostly the positives.

The result of that transition? Investors will buy in, and INTC will rally.

As of this writing, Luke Lango was long INTC.


Article printed from InvestorPlace Media, https://investorplace.com/2019/06/3-pros-3-cons-for-intel-stock-intc/.

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