By any account, Intel (NASDAQ:INTC) is a laggard this year. Shares of the semiconductor behemoth are up about 6% year-to-date, meaning the widely followed PHLX SOX Semiconductor Sector Index, in which Intel stock is the second-largest component at a weight of 8.21%, is beating that stock by a margin of better than 5-to-1.
On their own, chip stocks are more volatile than the broader market. The PHLX SOX Semiconductor Sector Index (NASDAQ:SOX) has a three-year standard deviation of 22.42%, more than double that of the S&P 500. Weighing on the near-term case for Intel stock and shares of rival chip companies is that volatility in the group could rise due to elevated trade tensions between the U.S. and China.
While that’s a long-running theme, the situation took a turn for the worse on Tuesday, Oct. 8 when it was revealed the White House has a blacklist of 28 Chinese companies it suspects of having some links to human rights violation against ethnic Muslims in China.
Chinese officials fired back, saying there could be repercussions and that the U.S. should mind its own business. This is a stark reminder that when it comes to semiconductor stocks, Intel or otherwise, China is a vital end market and any negative news regarding the U.S. and the world’s second-largest economy is bound to hinder semiconductor shares.
Intel stock is one name that underscores those vulnerabilities as highlighted by a 3.62% over the past month.
Bright Spots
Over the near-term, Intel is a risky bet, but for patient investors, the sun will rise again for this semiconductor Goliath and there are some green shoots to bolster that thesis. For example, Securities and Exchange Commission (SEC) filings indicate Intel CEO Bob Swan and Chief Financial Officer George Davis bought Intel stock in September.
While the purchases were modest in scale, it’s always a positive to see executives stepping into their company’s stock because they’re usually only doing that for one reason: because they expect the shares to increase in value. That’s a nice feather in Intel’s cap, but more importantly, the company is structurally sound and operates in some high-margin, fast-growing business. Cloud computing is just one example.
“As cloud computing continues to garner significant investment, Intel’s data center group will be an indirect beneficiary,” said Morningstar in a note on Intel. “Mobile devices have become the preferred device to perform computing tasks and access data via cloud infrastructures that require considerable server build-outs. This development has provided strong tailwinds for Intel’s lucrative server processor business.”
Asserting itself in markets such artificial intelligence, (AI), cloud computing and mobile is pivotal for the long-term Intel stock thesis because the personal computer market, long the company’s bread and butter, is mature and offers fewer avenues for rapid growth.
The intersection if AI and the semiconductor industry is important for multiple. Not only do semiconductor companies make chips that power various AI technologies, but AI is also being used by chip manufacturers to enhance quality and efficiencies.
Assuming Intel can grow its AI presence, the profit potential is considerable.
“For instance, specialized memory for AI has 4.5 times more bandwidth than traditional memory, making it much better suited to handling the vast stores of big data that AI applications require,” according to a McKinsey study published earlier this year. “This performance improvement is so great that many customers would be more willing to pay the higher price that specialized memory requires (about $25 per gigabyte, compared with $8 for standard memory).”
The Bottom Line on Intel Stock
One of the key tenants of the long Intel thesis is that while the company faces plenty of competition, much of it credible, the company still has scale on its side.
“Intel’s scale remains considerable. Between Intel’s x86 dominance in PC and server CPUs (85%-plus market share in aggregate, per Mercury Research) and aggressive focus on new chip opportunities (AI, automotive, 5G, and so on) we think it is more likely than not that the chip titan earns excess returns on invested capital over the next twenty years,” according to Morningstar.
Best of all, investors won’t have to pay up for these perks with Intel stock as the shares traded at just 10.91x forward earnings and less than 3x book value.
Todd Shriber does not own any of the aforementioned securities.
