Repeated Mistakes Are Bound to Haunt Intel Stock

Intel (NASDAQ:INTC) stock is cheap. The Intel stock price sits at just over 10 times earnings. Combined with a 2.7% dividend yield, there’s a value case for INTC stock at current levels.

Repeated Mistakes Are Bound to Haunt Intel Stock
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But I’ve been skeptical about that case for some time — and recent developments don’t change my mind. Fundamentally, Intel stock looks cheap. As a business, however, there are plenty of reasons why that is, and should be, the case.

Fundamental Concerns for INTC Stock

Intel stock was rolling not all that long ago. As of mid-April, the Intel stock price had risen nearly 30% in 2019 alone. And then first-quarter earnings sent the stock plummeting. INTC stock dropped 9%, wiping out some $23 billion in market value.

The catalyst was reduced guidance for 2019. Analysts and investors had been looking for a rebound in the second half of the year, after what looked like an early-year pause in datacenter spending. Intel’s guidance undercut that case.

Intel followed up a little over two weeks later with its three-year outlook — and that, too, disappointed. Intel is looking for flat sales in PCs — which investors might see as overly optimistic. Gross margins are going to be pressured amid Intel’s 10nm ramp. Three-year revenue growth, on the whole, even with double-digit growth in datacenter, is supposed to be in the low single digits.

It’s worth remembering that in both cases, INTC stock fell — and not because of investor overreactions. The guidance is coming from Intel itself and, in combination, it suggests that Intel’s growth is going to be rather meager for three years. Cyclical semiconductor stocks with minimal growth aren’t going to see big earnings multiples, which, alone, suggests that the Intel stock price at least is in the right ballpark.

How Many Mistakes?

There’s a broader problem with the disappointing guidance, however. It’s difficult for investors to trust Intel at this point, after a series of missteps. As Dana Blankenhorn pointed out last month, Intel is four years late in 10nm; Taiwan Semiconductor (NYSE:TSM) already is at 7nm.

Last year, it was discovered its chips were susceptible to hackers. This year, chip shortages have put its datacenter lead at risk, allowing Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) to take share in a market that Intel once dominated.

In CPUs, Intel seems at risk as well. AMD’s new Ryzen line has been a hit. Intel’s shortages are frustrating customers like Dell Technologies (NASDAQ:DELL). Intel’s long dominance in PCs may have allowed it to rest on its laurels; it does not, at the moment, have an answer for AMD’s rise.

So, can investors trust that PC revenue is going to stay flat — when AMD clearly is taking market share? Is datacenter revenue going to rise double-digits every year when Intel can’t keep up with even slower demand? Guidance was disappointing — and it looks far from certain Intel will be able to even meet its projections.

The fundamentals don’t look great. The qualitative aspects look even worse. Nvidia and, in particular, AMD clearly are taking share. Intel not only doesn’t have an answer right now, it actually seems to be shooting itself in the foot. Given trade war concerns and overall chip weakness, there are plenty of reasons for investors to be worried.

The Intel Stock Price Can Get Cheaper

All told, it’s not a surprise that Intel stock has fallen so far. Indeed, it wouldn’t be surprising if Intel stock fell further. 2019 expectations clearly are at risk. 2020 and 2021 growth doesn’t look particularly impressive. In a chip space with no shortage of cheap stocks — think Broadcom (NASDAQ:AVGO) and Qualcomm (NASDAQ:QCOM), to name two — INTC hardly looks like an attractive pick.

Admittedly, that could change. But it requires that Intel start fixing its mistakes — and start improving its products. It seems we’re still a ways off on both fronts. Until then, INTC is likely to trade sideways at best.

As of this writing, Vince Martin has a bullish options position in Dell Technologies. He has no positions in any other securities mentioned.

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