As an investor, I’ve closely followed the semiconductor chip market over the past few years, and have learned that of the three big stocks in the CPU and GPU worlds — Intel (NASDAQ:INTC), Nvidia (NASDAQ:NVDA), and Advanced Micro Devices (NASDAQ:AMD) — INTC stock is the least loved of the group.
There’s reason for this. AMD and Nvidia are trendier picks. AMD is on this jaw-dropping ramp from irrelevant, nearly bankrupt CPU/GPU maker a few years back, to a force to be reckoned with today that is rapidly growing share in the most important niches of the CPU and GPU markets. At the same time, Nvidia has turned into an “AI everything” company, and is basically the go-to graphics suppliers for all of tomorrow’s most important markets.
Investors like those narratives. That’s why, over the past year, AMD stock is up 155% and NVDA stock is up 67%.
Then there’s Intel. They are simply the established incumbent that is growing modestly in stable markets, and this lack of trendiness is why INTC stock is up “just” 23% over the past year.
For the foreseeable future, Intel will remain less trendy than its peers. But the stock will keep working, and with much less downside risk, because the secular growth drivers remain favorable while the valuation remains attractive relative to peers.
As such, I wouldn’t discard INTC stock because it isn’t AMD or NVDA. I’d embrace its differences, and ride the stock to new highs in 2020.
Embrace Intel’s Differences
It’s easy to look at Intel, see a company that is losing CPU market share to AMD and is growing revenues and profits at a snail’s pace, and write off INTC stock as a poor investment in an otherwise hot semiconductor market.
But that cursory analysis misses the whole point of why someone would invest in Intel. Intel is stability, not rapid growth. It’s steadiness, not volatility. And it’s cheap, not expensive.
You don’t buy INTC stock for its rapid growth potential. At a $250 billion market cap and with $70 billion in revenues, Intel’s market cap and revenues aren’t going to soar higher anytime soon. Instead, you buy Intel for stability. Given its huge incumbency in several important CPU markets, Intel reasonably projects as a healthy, low single-digit revenue grower for the foreseeable future, with very little variance from that growth rate.
You also don’t buy INTC stock for the huge gains. You buy it for its steadiness. Compare the 10 year charts of INTC, NVDA, and AMD. Yes, Intel has under-performed over that time frame. But it’s also experienced only four drops of 25% or more during that stretch. AMD has gone through over 10. So has Nividia. And both have seen their share price drop 50% multiple times. Intel stock’s biggest drop over the past 10 years was about 30%.
Meanwhile, you buy INTC stock because it’s cheap and shielded from valuation risks. At 12-times forward earnings, Intel is dirt cheap next to AMD stock and NVDA stock, both which trade at over 40-times forward earnings.
INTC Stock Will Keep Working
Stability, steadiness, and a relatively cheap valuation are reasons risk-adverse investors should be attracted to Intel stock for the long haul. But in the near term, there are three additional reasons why shares could break out to new highs in 2020.
First, global information technology (IT) spending trends will improve in 2020, laying the groundwork for heavier investment into the CPU market. Thanks to easing trade tensions and supportive monetary policy, Gartner expects IT spend to rise 3.7% in 2020, versus just 0.4% growth in 2019. This rebound in IT spending will push Intel’s revenue growth rates higher this year.
Second, mainstream commercial 5G expansion will create bigger demand for Internet-of-Things (IoT) CPUs. Broadly, 5G is more about better smartphone connectivity — it’s about enabling an entire new era of IoT connectivity. Consequently, as 5G goes mainstream next year, the IoT industry will undergo a renaissance, demand for IoT CPUs will accelerate, and Intel’s revenue growth rates will improve, because Intel has established dominance in the IoT CPU market.
Third, Intel is set to launch next-generation 7-nanometer CPUs in 2021, the first new batch of lower power CPUs from Intel in some time. Ahead of this landmark new product line launch, investors will likely bid up INTC stock in anticipation of big growth from these new products.
Bottom Line on INTC Stock
Intel may be less trendy that Nvidia and AMD. But, that that doesn’t make an investment into INTC stock any worse than an investment into NVDA stock or AMD stock. It just makes it different.
In Intel’s case, different will work. Over the next several quarters, Intel stock should move higher on the back of improving IT spending trends, rising IoT CPU demand, and increasing optimism surrounding the company’s 7-nanometer product launch in 2021.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
