Intel (NASDAQ:INTC) stock has had a tough time in 2019. While shares are up for the year, the stock has under performed its semiconductor peers. With the company losing CPU market share to Advanced Micro Devices (NASDAQ:AMD), it’s no wonder investors have left INTC in the dust. In addition, the macroeconomic environment has not been friendly to INTC stock. Or to the chip space in general.
While resumed trade talks have already resulted in “progress“, investors remain skittish whether the U.S.-China trade fracas will lead to further headwinds for the chip space.
But looking beyond these variables, Intel remains a solid stock to own. Selling at a low valuation, it offers value in a space dominated by speculative growth names. It pays a solid dividend, and has the cash flow to support it. While you may not see big gains from Intel, it may be a great blue chip opportunity. Let’s take a closer look at Intel, and see why the stock may be a buy at today’s price.
Intel vs. AMD
I believe the CPU wars are the most important factor when assessing Intel stock. While the trade war is a big risk, long-term AMD’s purported recriminating of CPU market share threatens INTC’s economic moat. Intel’s dominant market share has given it pricing power and other advantages to ensure the stock remains a cash cow. But with AMD eating more of Intel’s lunch, it seems that this gravy train could soon be over.
But what is the truth behind the hype?
It’s no joke that AMD’s Ryzen processors have been a game-changer. The success of this chip line has helped AMD seize more of Intel’s CPU market share since 2017. AMD now has a staggering 30% market share of the CPU market. If this trend continues, AMD could reach market share it hasn’t seen since the mid-2000s, when it had over 40% CPU market share.
However, could this be but a short-term blip? Intel’s market share losses are the result of their chip shortage. Their inability to adapt to 14-nanometre sized processor lead to supply issues. End-users simply switched from Intel to AMD.
Perhaps AMD’s market-share grab will taper off in the next few quarters. InvestorPlace’s Ian Bezek believes so. In his Oct. 9 article, he pointed out how while AMD’s market share has grown materially, it cooled off in the last quarter. However, as an aside, Bezek pointed out how Microsoft (NASDAQ:MSFT) partnering with Qualcomm (NASDAQ:QCOM) for chips in their Surface tablets highlights market share risk. Mobile chips have not been successful in the past when used in tablets. But with improvements in technology, mobile chip makers like Qualcomm now offer a compelling alternative to Intel’s x86 CPUs.
Despite Headwinds, INTC Stock Is Undervalued
Intel stock trades at a low valuation relative to most of its peers. INTC trades at a forward price-to-earnings (P/E) ratio of 11.6. The stock’s enterprise-value-to-EBITDA (EV/EBITDA) ratio is 7.7. Here are the respective valuations of INTC’s key competitors:
AMD: Forward P/E of 27.8, EV/EBITDA of 64.7
Broadcom (NASDAQ:AVGO): Forward P/E of 12, EV/EBITDA of 14
Qualcomm: Forward P/E of 18.3, EV/EBITDA of 8.4
Nvidia (NASDAQ:NVDA): Forward P/E of 26, EV/EBITDA of 40
Texas Instruments (NASDAQ:TXN): Forward P/E of 5.9, EV/EBITDA of 3.1
One thing to keep in mind is Intel’s lack of long-term revenue growth. Analyst consensus estimates revenue will only grow from $69.4 billion in 2019 to $70.9 billion in 2020. Clearly, INTC stock is no growth play. But Intel stock more than makes up for in terms of return of capital to shareholders.
INTC stock currently pays a 2.42% yield. While not the highest yielding blue-chip, it is otherwise a solid dividend. With a payout ratio of just 35.92%, there’s plenty of room to grow this in coming years. The average 5-year growth rate for the dividend has been 5.92%.
Along with dividends, Intel has bought back a lot of stock. For the first half of 2019, they repurchased $5.6 billion worth of shares alone. These buybacks are accretive to Intel shareholders, as they improve earnings-per-share over the long-term.
Bottom Line: Intel Is a Solid Long-Term Investment
There’s not much of a “play” with INTC stock. The company’s main appeal is their cash-generating status and relatively low valuation. Key risks like competition and China may already be priced into shares. But if both of these issues accelerate, it does threaten the bull case for Intel stock.
So what’s the call? Are you looking for a solid dividend payer? Consider Intel stock. Are you looking for a contrarian chip play? Perhaps look elsewhere. Whether or not INTC maintains its moat, it is unlikely the company will see monumental revenue growth. Other chip names may offer this proposition.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.