There’s a significant problem for Intel (NASDAQ:INTC) stock: the company is losing market share. Admittedly, that issue has been manageable so far. Intel stock has doubled in less than six years, paying a healthy dividend along the way.
But even that gain highlights a potential difficulty for INTC stock looking forward. Since the beginning of 2014, Intel stock has risen 95%, and 130% including dividends.
Meanwhile, the iShares PHLX Semiconductor ETF (NASDAQ:SOXX), a semiconductor index fund, has nearly tripled. Shares in the two companies taking market share from Intel have soared. Nvidia (NASDAQ:NVDA) is up roughly 1,000%, and Advanced Micro Devices (NASDAQ:AMD) almost 700%.
Intel has underperformed in a bull market for chip stocks and notably underperformed two of its key competitors. Given that market share gains are likely to continue, that backward-looking fact creates a significant problem for the forward-looking bull case.
Market Share Losses
Intel is losing market share in key areas of its business. The company even admitted as such this month. AMD’s well-received Ryzen line is winning in CPUs. AMD and Nvidia are driving sales in a datacenter market of which Intel recently owned over 96%.
It’s tough to see how that changes. The new Ryzen 3000 chips have generated buzz since before their launch this summer. AMD has gone from being the low-cost producer for low-priced PCs to a real competitor in the category. U.S. manufacturers HP (NYSE:HPQ) and Dell (NASDAQ:DELL) are making a concerted effort to focus on the higher end of the consumer market and now using Ryzen chips (and Intel products as well) to help drive that effort.
In datacenter, a spending slowdown has pressured suppliers. Nvidia’s datacenter revenue, for instance, is down 12% in the first half of its fiscal 2020. But both companies clearly have taken share from Intel leading into this year, even if the market has been disappointing in 2019.
Intel is trying to fight back, but it has a tough road ahead because it simply hasn’t executed very well of late. It’s years late in moving simply to 10 nm. Meanwhile, AMD already is launching a monster 7 nm gaming CPU. (Admittedly, that launch has been delayed until November.)
The share losses are going to continue. And that’s probably not great news for INTC stock.
The Case Against Intel Stock
To be sure, Intel still can grow revenue and profits even if it loses market share. PC sales have been reasonably strong, particularly for corporate customers. Gaming demand should continue. Datacenter demand seems to have hit a pause, but companies including Nvidia are forecasting a second-half recovery.
Meanwhile, Intel’s share has been so dominant that even a few points of market share don’t create that significant of a headwind. As an INTC bull pointed out last week, share is enormously important to AMD’s revenue growth in CPUs, but has a modest effect on Intel’s numbers.
But that case only holds if Intel’s end markets grow. If that’s the case, however, why own Intel stock? Datacenter growth will do more for Nvidia and AMD than it will for Intel. Continued strength in PCs is a bigger deal for the likes of HPQ and DELL (the latter of which I own).
Any Intel bull case has to be based on the idea that its end markets will grow. But that growth most likely benefits rivals more. That growth has driven chip stocks on the whole to nearly triple since the beginning of 2014. Over that stretch, INTC stock underperformed its sector. As long as market share losses continue, the same trend will hold going forward.
The Case for Intel Stock
So any investor arguing for Intel stock on the basis that chip demand, on the whole, will rise, probably should look elsewhere. But, to be fair, there are reasons to consider Intel stock around $50.
For one, INTC is notably cheaper than those rival stocks. An 11x forward P/E multiple prices in basically zero growth going forward. And it also suggests some downside protection. Nvidia was halved late last year. AMD stock has been historically and notoriously volatile.
Admittedly, Intel stock has made big moves, including a ~25% plunge in last year’s fourth quarter. But it likely doesn’t have the same downside risk of many of its peers. And a 2.5% dividend yield is attractive, particularly with the 10-year Treasury at 1.68%.
That said, buying a stock for a dividend is a dangerous proposition. Indeed, investors could have made a similar argument about General Electric (NYSE:GE) at $30+. Few predicted that its dividend would be nearly eliminated, though Intel doesn’t have the same balance sheet problems that industrial giant had.
Even assuming the dividend is safe (and it likely is), the argument for Intel being the safe play seems awfully narrow. Why buy a stock since it might hold up OK (or decline less) if its sector gets rocked? For a chip bull, there is a wealth of choices including equipment suppliers Lam Research (NASDAQ:LRCX) and Applied Materials (NASDAQ:AMAT), that have exposure across end markets.
If an investor wants to bet on chip growth being driven by Internet of Things, gaming, returned datacenter demand, and other catalysts, INTC simply isn’t the play. If that investor doesn’t want to take the bet, there are myriad other stocks in myriad other sectors from which to choose.
This is precisely the problem created by Intel’s ongoing market share losses. It doesn’t mean that INTC is going to crash, or that the stock should be shorted. (I don’t believe either is true.)
In fact, at a currently reasonable valuation, INTC stock may well rally. It could double again in the next six years. But in that scenario, it’s hard to believe that investors won’t be looking back and realizing that they could have done better.
As of this writing, Vince Martin owns a bullish options position in Dell Technologies. He has no positions in any other securities mentioned.