Strictly looking at the ink, Intel (NASDAQ:INTC) appears a solid investment. Despite the U.S.-China trade war clouding the semiconductor firm’s primary industry, INTC stock is up over 25% year-to-date. Yet that metric hides a lot of frustration surrounding the organization.
For over a year, Intel has incurred several embarrassing headwinds. Obviously, the one that generated the most headlines and controversy is former CEO Brian Krzanich’s resignation over a “consensual relationship” with an employee. It’s just that in the #MeToo era, this was not a great look for Intel stock.
On the operational end, INTC has struggled with production issues for its next-generation computer chips. According to the latest update, the company is still struggling with meeting demand, potentially hurting the longer-term prospects for INTC stock. Based on the options market, some traders have given up on the bullish thesis.
This is all incredibly frustrating for those long on Intel stock primarily due to missed opportunities. For one thing, rival Advanced Micro Devices (NASDAQ:AMD) has been churning out innovation after innovation, advantaging Intel’s missteps. It’s hard to respond when you can’t get your own chips off the ground.
Second, the U.S. and China have signaled at least some intent to get a trade deal signed. While it’s difficult to predict anything with the current administration, the apparent thawing is a positive for semiconductors. True, INTC stock has benefitted. However, its rivals have enjoyed more of the market windfall because they have their stuff together.
Therefore, I can’t find much to love about Intel stock in the nearer term relative to the competition. However, does that mean shares are a lost cause? Not, I’ll argue, if you’re a patient investor.
INTC Playing AMD’s Game
Prior to Lisa Su taking over the top executive slot at AMD, the company was known for discounted performance: Essentially, AMD was the Walmart (NYSE:WMT) of semiconductors.
But in the meaty part of Su’s recovery efforts, AMD stopped playing second fiddle to Intel. Instead, it invested increasing resources to competing with the best in the business, while still delivering value. As such, AMD shares skyrocketed while INTC stock enjoyed more modest gains.
And as you might expect, with AMD smelling blood in the water, it’s pursuing the premium semiconductor market with gusto. That has left Intel and other well-heeled rivals like Nvidia (NASDAQ:NVDA) scrambling for answers.
Interestingly, Intel’s tactic now is to borrow from AMD’s original game plan: Provide astounding value at even more astonishing prices. Intel’s latest product, the Core i9-10980XE based off its flagship Cascade Lake-X processor, goes head-to-head with AMD’s Ryzen 9 3950X.
But while the Core i9-10980XE’s predecessor was priced at close to $2,000, Intel will offer the latest processor for around $1,000. That’s a huge deal for end users because the Ryzen 9 3950X is only a few hundred dollars cheaper. However, according to Forbes contributor Antony Leather, Intel’s processor provides more system bandwidth.
I’m very curious how this strategy shift will play out for INTC stock. After all, Intel has the financial resources to easily play the discount game. Annually, its cash flow has been strongly positive going back to at least 2004. And while its earnings growth has declined, it’s still consistently positive.
On the other hand, AMD wants to compete in the premium chip space. While it’s currently doing a phenomenal job, one wonders how long it can keep it up.
Intel Stock Is a Safer Pick
To no one’s surprise, the big question mark regarding semiconductors is the trade war. If we get a substantive deal signed, that would be more beneficial for AMD. The smaller chipmaker needs all the positives it can get.
However, if the trade war drags on, the case for INTC stock becomes increasingly stronger. Both companies have about the same revenue exposure to China: 26.6% for Intel (in 2018) and approximately 26% for AMD.
But as I mentioned above, they do not have the same fiscal stability. If trade talks deteriorate for the worse (again), Intel is simply better suited for a war of attrition. And even if the trade talks shift positively, Intel stock will benefit — just not as much as AMD.
Therefore, the strategy for INTC stock is clear-cut. It just depends on your risk tolerance. Those that want conservative exposure to the semiconductor industry should probably stick to Intel.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
