Intel (NASDAQ:INTC) seems to be on the verge of a major breakout rally. From near-term lows of $44.90 near the end of August, INTC stock is already higher by 30%. The rally has been supported by healthy third quarter numbers and an upbeat guidance.
However, I believe that it might be too early to assume that the current rally is sustainable. Over the next 12-24 months, INTC is likely to see escalating competition from Advanced Micro Devices (NASDAQ:AMD). Concern related to AMD’s growth in market share is likely to dampen investor sentiment on Intel stock.
AMD’s desktop market share has increased from 9.1% in Q3 2016 to 18.0% in Q3 2019. The company’s Ryzen series processor has been gaining ground over Intel and I expect that to continue. Even in the data center segment, AMD’s market share has increased from 0.8% in Q4 2017 to 4.3% in Q3 2019.
Of course, the data center market share shows that Intel is a leader by a big margin. However, the markets could be looking at AMD’s gradual growth with concern. As AMD’s CEO Lisa Su noted, “EPYC server processors grew more than 50% after the chip maker launched its new Rome platform in August.”
There is speculation that AMD’s market share could more than double by the end of 2020. If this does hold true, I expect INTC stock to witness a correction in the coming year. I do see a high probability of strong market share gain by AMD considering the initial reviews for EPYC processors.
I am certainly not suggesting an extremely bearish scenario for INTC stock. My only point is that the current rally will face headwinds. Investors can therefore wait for correction before exposure to Intel stock.
Intel Stock Seems Inexpensive
INTC stock is trading at a forward price-to-earnings ratio of 12.6x as compared to a forward PE of 58.5x for Advanced Micro Devices. However, on a standalone basis, PE does not reflect a level of undervaluation or overvaluation.
Over the next five years, analysts expect 7.04% annual earnings growth for INTC stock. On the other hand, annual earnings growth for AMD is expected to be 36.5% for the same period.
Clearly, there is a reason markets have assigned a premium valuation to AMD as compared to Intel stock.
Considering the valuation, the downside for INTC stock might be limited. However, PE valuation does not justify preferring Intel over AMD.
Intel Will Also Launch 7nm Process
It is likely that Intel will be launching its 7-nanometer process in 2021. As competition grows, Intel will be looking to hold market share through relatively lower pricing and through an accelerated launch of 7nm process.
However, it is worth noting that AMD’s 7nm processors will be manufactured by Taiwan Semiconductor Manufacturing (NYSE:TSM).
TSM has said it will start risk production of 5nm processors in the second half of 2019, with volume production in 2020. TSM is therefore a year ahead of Intel and Advanced Micro Devices will leverage on this gap to continue gaining market share.
When INTC launches 7nm process in 2021, AMD might be positioned to launch 5nm process. Again, Intel remains the market leader that is going to face increasingly stiff competition from AMD.
Final Words on INTC Stock
Intel is finally moving from a more complacent period to a phase of relatively aggressive product launch. However, AMD is clearly ahead in terms of superior offering at a competitive price.
Therefore, even with market leadership and sustained value creation through dividends and repurchases, INTC stock will face headwinds. If the pricing war intensifies, there could be margin compression in the future.
Overall, profit booking might be the right approach in the current rally as Intel stock can possibly trend lower.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
