Intel (NASDAQ:INTC) stock appears to have begun a recovery from the 25% drop it recently experienced. However, it also represents the latest setback Intel stock has faced as it struggles to make a comeback.
Once a tech leader during the PC era, it now struggles to keep up with its old rivals. However, the innovation that inspires changes in a key statistic could eventually foster a recovery in INTC.
Things have changed for Intel, and not for the better. Once the world’s largest chip company, it has seen its dominance wither away. While the company has numerous competitors, the most significant challenges have come from Nvidia (NASDAQ:NVDA) and the PC-era rival it used to dominate, AMD (NASDAQ:AMD).
In many respects, Intel stock has become cheap for a reason. The company fell behind its old rivals in some areas, and doubts about management continue. In just this year alone, a rally had sparked optimism in INTC in the first four months of the year. However, lowered guidance quickly erased most of those gains over a four-week period starting in late April.
Intel Stock Needs a Catalyst
Despite this drop, I have consistently held to a bullish outlook on Intel, mostly because of valuation. However, its price-to-earnings (PE) ratio of around 10.6 has not led to consistent growth in the stock. Nor does it compare to the 30-plus multiples INTC commanded during the PC era. It likely will not see those valuations again until an obvious motivation appears. The forecasted earnings increases of -6.3% for this year and 5.6% in 2020 will probably not inspire buying.
However, a catalyst may appear soon.
As my colleague James Brumley points out, both Project Athena and Mobileye offer prospects for recovery. Athena will bring to market a next-generation PC featuring both artificial intelligence (AI) and 5G wireless capability. Mobileye places Intel in the driverless car market. Not only that, but Mobileye also benefits from a 70% market share.
Even more important for holders on Intel stock, the emergence of these technologies could bring something INTC stock needs—multiple expansion. History shows that high-profile tech firms often fall to around 10 times earnings when both the firm’s direction and the prospects for continued profit growth become uncertain.
The 10.6 multiple compares well to where both Nvidia and Microsoft (NASDAQ:MSFT) traded when they first saw the PC’s importance drop. As a result of moves to redefine itself, MSFT trades at 29.2 times earnings. Even after last year’s dramatic decline, NVDA’s PE ratio stands at around 28.4.
Intel needs to do the same thing. With Athena and Mobileye, Intel could see such multiples again once 5G and driverless cars become more common.
Investors should note that taking Intel to almost 30 times earnings would almost triple the stock by itself. Moreover, success with new technology could return profit growth to double-digits. This would further add to the growth of INTC.
The question is when this virtuous cycle will begin to take place? INTC stock has traded in a range since late 2017. However, the recent decline took it toward the bottom of the range, making it a buy.
With the stock price close to $47 per share right now, a run toward the 52-week high of $59.59 per share would bring more than a 20% increase. INTC may struggle to move beyond that level without a catalyst. However, for those who can wait for their latest innovations to become more widely adopted, a run to the top of its range might only constitute the beginning.
The Bottom Line on Intel stock
Once society adopts its new technology, Intel could benefit both from rising profits and a return to the valuations it saw in past decades. Intel has seen its prospects fall along with its PE ratio as old rivals have out-innovated the chip giant. However, the rise of 5G and self-driving cars could bring Intel back to the forefront.
Moreover, if INTC can move beyond its almost-single-digit multiple and trade at a PE comparable to its peers, a little patience could yield a significant amount of long-term profit.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.