Should Long-Term Investors Temper Immediate Bearishness In Intel Stock?

If a second-half semiconductor pickup doesn't happen, INTC stock is likely to be volatile with a downward bias

After a disappointing June 7 jobs report, Wall Street is now pricing in an interest rate cut by the Fed. Indeed, a rate cut expectation has propelled stocks for the past week, the best for U.S. stocks since November. One stock that has risen along with the tide is Intel Corporation (NASDAQ:INTC), the world’s largest semiconductor chipmaker. INTC stock is up 3.4% since Friday, compared to a 2.2% gain for the Nasdaq Composite index.

Should Long-Term Investors Temper Immediate Bearishness In Intel Stock?

Intel is scheduled to report second-quarter earnings on July 25. Today, I’d like to discuss whether the current price level of Intel stock offers a viable long-term entry point for long-term investors?

How Does Intel Stock Make Money?

Let us first remember what the main drivers of revenue for INTC stock are. Intel’s two largest segments are the client computing group (CCG) and data center group (DCG). Combined they contribute almost all of Intel’s operating profits.

CCG includes Intel’s PC and mobile-device chip business. The central processing unit (CPU) is the “compute” in the computer. Intel’s CGC segment makes the CPUs.

INTC controls nearly three quarters of the CPU market, and Intel processors are the main component — “Intel Inside” — in most of the world’s personal computers and servers.

Yet, the worldwide PC market, which is also Intel’s core market, has been flat for the past few years. And smartphones and cloud have been disrupting this segment.

To shareholders’ dismay, Intel has struggled to produce 10-nanometer chips, whereas Advanced Micro Devices (NASDAQ:AMD) has started taking market share with Ryzen and EPYC processors.

On the other hand, Intel’s DCG segment makes CPUs that are optimized for enterprise-grade hardware, namely for data-center servers. On April 2, the company held its Data-Centric Innovation Day, when it reaffirmed performance leadership in data center products and unveiled its next-gen processors as well as platform technologies.

Intel currently holds a 98% share of the data center server market, which has been a consistent growth driver for the company. In 2014, about a third of Intel’s revenue was data-centric; now it’s half.

Many investors want Intel’s technological innovations to increase its ecosystem in diverse growth segments, including artificial intelligence (AI), 5G and autonomous driving (AD). These emerging sectors all require data in enormous quantities and at extremely high speeds.

Wall Street would like to see further growth opportunities as Intel re-orients itself to rely less on PCs and improves its revenue model to capitalize on the growth of the data business globally.

Where is INTC Stock Now?

On April 25, Intel reported mixed Q1 2019 earnings results. Total revenue was basically flat at $16.06 billion. Investors got especially spooked when management cut both its Q2 and full-year guidance.

Over the past few weeks, INTC stock has been in a free-fall after reaching a 52-week high of $59.59 in April. Later in May, it saw a 2019 low of $42.86.

The recent pain in Intel’s stock price has also coincided with the increased geopolitical tensions over the U.S.-China trade wars.

Furthermore, Wall Street is currently debating whether the semiconductor industry, which is highly competitive and cyclical, has entered a prolonged downturn.

The shares of Intel’s competitors, including Micron Technology (NASDAQ:MU) and Nvidia Corporation (NASDAQ:NVDA), have also fallen considerably. The iShares PHLX Semiconductor ETF (NasdaqGM:SOXX) is down 8%. Could these chip stocks have reached the peak of their valuations in the eyes of value investors?

In other words, the current economic and political environment in the U.S. and globally poses plenty of questions for market participants. The semis are all in the same boat and there are not yet enough encouraging signs of a second-half pickup.

Intel stock owners have been resetting and lowering their growth and share price expectations. If INTC’s revenue growth decelerates in the second half of the year, then the INTC stock price will also go down further.

As of date, Intel stock is hovering around $47. Although the broader markets and tech stocks have gone up in the past few trading sessions, I’d urge investors to not get too optimistic with Intel stock just yet.

In May, most tech stocks had been way oversold, so a relief rally was inevitable in early June. For retail investors, discipline would be rather crucial at this point.

INTC stock price has a lot of support around the low-$40’s. It will likely test this level again, especially if there is any general weakness in the tech sector or negative company specific news.

Important Catalysts Supporting Intel’s Stock Price

Going forward, there are two important factors that will likely support Intel stock price. First one is INTC stock’s dividend yield of 2.86%. Intel has increased its dividend in five of the last 10 years.

Its current payout ratio stands at a respectable 28%. This metric shows the percentage of earnings paid to INTC shareholders in dividends. After paying the dividend, Intel has ample cash for investing in the core business.

In general, investors pay attention to this ratio as a number over 100% would mean that a company returns more money to shareholders than it earns, meaning an unsustainable dividend in the long-run.

Dividends are ultimately paid out of cash. Therefore dividend investors also pay attention to whether a company is able to generate cash. Intel’s trailing twelve months (TTM) cash flow from operations is a healthy $28 billion. Its total free cash flow (TTM) for the period that ended in Mar. 2019 stood at $12.5 billion.

It would be safe to say that Intel should be able continue paying and possibly increasing dividends in years to come.

Only a handful of established technology companies offer investors stable and growing dividends — an important important reason why Intel stock belongs to a capital-growth portfolio. In other words, many investors would rank Intel as a strong income stock.

Secondly, with a market cap of $209 billion, Intel stock is unlikely get held down by the market for too long. The Street tends to regard large market cap companies as good and stable long-term investments.

Intel’s trailing P/E stands at a historically low level of 10.58. Therefore, investors looking for value in large-cap stocks are likely to be drawn to INTC stock’s current valuation levels, too.

In case of further price weakness, I believe that Intel management may also consider buying back shares around $40 levels — a move that would support the stock price.

Short-Term INTC Technical Chart Tells a Mixed Story

Year-to-date, Intel stock is down 2%. After investors’ harsh response to the Q1 earnings report, INTC stock has suffered from a damaging technical picture. Its short-term technical chart still looks weak, and it is pointing to the possibility for more downside around the corner.

Although Intel’s momentum indicators, which describe the speed at which prices move over a given time period, are currently in oversold territory, they can stay oversold for quite a long time, especially when the overall trend is down.

Therefore, more buy signals based on momentum indicators need to be confirmed with further chart analysis before the stock is a buy from a technical standpoint.

From a technical perspective, I am not expecting Intel stock to make a significant leg up any time soon. In the next few weeks, INTC stock is likely to be range-bound, between $42.50 and $47.50.

If you still believe in the long-term bull case for Intel stock, you might consider waiting for a better time to get long, such as around low-$40 levels.

Expect nearer-term trading to be choppy at best, possibly until the next quarterly report.

Intel stock will need to stabilize and build a base again before a long-term sustained leg up can occur. Investors need to be careful about chasing the stock at this point. In other words, the technicals are not in the favor of long-term investors, yet.

Bottom Line on INTC Stock

If the Fed decreases interest rates in 2019, investor sentiment regarding the U.S. economy is likely to improve. Then infrastructure and tech spending may also increase and Intel stock is likely to benefit from these economic developments.

Therefore, over the long term, I would not bet against INTC stock. In the short-term, though, the share price of the chip giant is likely to be choppy and somewhat of a mixed bag. Many investors may decide to wait to hit the buy button on INTC stock until they have seen the next earnings results in late July.

I’d urge investors to keep in mind that there is a wide range of issues affecting semiconductor stocks in general and Intel in specific.

If you already own Intel shares, you may either consider taking some money off the table during this market bounce or hedging your positions.

As for hedging strategies, covered calls or put spreads with July 19 expiry could be appropriate as straight put purchases are likely to be expensive due to heightened volatility.

A hedged position would give investors breathing space until the markets potentially calm down. Then, as earnings season approaches, they can decide on the best course of action for their portfolios, with less anxiety than an unhedged investor.

As of this writing, the author did not hold a position in any of the aforementioned securities.

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