Intel (NASDAQ:INTC) stock has been cheap for some time. But bears argued that Intel stock deserved to be cheap. Continuing execution missteps from the chip giant seemed to open the door to competitors. With rivals like Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA) seemingly firing on all cylinders, Intel’s growth, and perhaps even its dominance, seemed at risk.
Indeed, that’s precisely the argument I made last year — and I believe with good reason. The criticism of Intel’s execution wasn’t backed simply by a few missed targets. The company’s own guidance for 2019 and beyond suggested a material financial impact from Intel’s lagging development.
And those concerns still exist. But with recent results better than expected, and Intel stock rising, those concerns now might be viewed in a different light. The worry last year was that Intel was falling behind. The case for INTC now is based on what might happen if and when the company catches up.
Intel Falls Behind…
There’s simply no question that Intel’s execution has been disappointing in recent years. On this site last year, Dana Blankenhorn detailed the company’s many missteps. The company at the time was four years late in developing its 10nm manufacturing process. On last month’s fourth quarter earnings call, chief executive officer Bob Swan said the company was still working on improving 10nm yields. But per that call, Intel still won’t have a 10nm product available for desktop personal computers this year.
AMD already is moving material revenue at 7nm. That company’s CEO, Lisa Su, said on her company’s fourth quarter call that “about half” of the quarter’s record revenue came at that node. Intel won’t get there at all until the end of next year.
That’s not the only issue. Intel continues to deal with supply shortages of its PC chips. As of the end of 2019, Swan said the company still was “constraining our PC customers” like Dell (NASDAQ:DELL) and HP Inc. (NYSE:HPQ).
In its core businesses, Intel simply isn’t executing well enough. And elsewhere, it’s struggled. An effort to challenge Qualcomm (NASDAQ:QCOM) in baseband modems flamed out. By one estimate, Intel lost $16 billion in mobile before dumping the business to Apple (NASDAQ:AAPL) for $1 billion.
Intel’s business still relies heavily on PCs — what the company calls “PC-centric” revenue accounted for over half of 2019 sales — and data center chips. Those are two end markets in which Intel has been dominant, and almost unchallenged, for years. It hasn’t been able to create a material business elsewhere. Meanwhile, AMD’s Ryzen line has turned that former also-ran into a real competitor, and both AMD and Nvidia are targeting Intel’s profitable datacenter business.
…And Yet Intel Comes Out Ahead
Those issues pressured Intel’s financial performance. The company cut its full-year outlook after the first quarter report in April, sending INTC stock plunging. A three-year outlook given just weeks later too, was disappointing: Intel stock would come close to reaching an 18-month low in May.
Yet less than year later, the news suddenly looks quite different. Intel has posted three solid quarters in a row, including a blowout fourth quarter report last month that sent shares soaring to a 20-year high.
Most notably, the biggest strength for Intel in Q4 was in data center chip sales. On average, analysts expected year-over-year growth of 5.2%. Revenue increased 19%. And while a recovery in that market isn’t necessarily unexpected, AMD’s data center revenue actually fell short of expectations.
To be sure, AMD took some share. Nvidia may well do the same, given that peer numbers bode well for its earnings this month. But Intel’s share in that key market clearly was better than expected. That in turn raises an interesting question.
The Case for Intel Stock
Expectations aside, Intel’s financial performance still hasn’t been all that impressive. Revenue rose just 2% in 2019, with Intel guiding for similar growth in 2020. Operating profit declined last year; the outlook for this year suggests the figure still will come in modestly below 2018 levels.
But the performance at least hasn’t been as bad as feared, given the company’s execution challenges. And so now the question becomes: what happens to the numbers when Intel finally gets back on track? Intel’s market dominance is keeping PC customers patient amid chip shortages. Datacenter providers mostly are sticking by the company despite competition from hard-charging Nvidia and AMD. Surely, the company will get more customers, or at least more sales, once its products have caught up to those of its rivals.
In a counterintuitive sense, Intel has more upside than AMD, which clearly is firing on all cylinders. An investor could argue that AMD has wrung every dollar of potential sales and profit out of its opportunities already. Intel quite obviously has not.
Meanwhile, Intel stock is not terribly expensive based even on recent performance. Shares trade at less than 13x 2020 earnings per share guidance of $5.00. A 2.06% dividend yield tops that of the 10-year Treasury bond. Yet if Intel can keep earnings stable when it’s not performing well, it should be able to grow profits when it is. Even with INTC returning, finally, to levels reached during the dot-com bubble, that growth doesn’t appear priced in.
The Case Against INTC
It’s the combination of decent-enough results and room for improvement that makes Intel intriguing even at the highs. But it’s that combination that also suggests a bit of caution.
After all, it’s not as if Intel is performing well. Q4 did look like a blowout quarter relative to expectations, but total sales increased 8% y/y. AMD’s revenue grew 50% on the same basis; analysts expect Nvidia to increase revenue by 34%. Growth rates for those two companies admittedly are benefiting from comparisons to prior-year quarters affected by the bursting of the cryptocurrency bubble. Still, there’s no argument that Intel actually is keeping pace in terms of market share.
Meanwhile, Intel’s mostly stable full-year results have come amid tailwinds in key end markets. PC sales have been higher than expected, in large part due to the end of support from Microsoft (NASDAQ:MSFT) for Windows 7. That led corporate customers to move to Windows 10 models, boosting unit demand. That upgrade cycle is ending, a potential risk to PC-related sales in the second half of this year.
Datacenter demand unquestionably bounced back in the fourth quarter after fading early last year, but growth rates there likely will moderate as well.
The worry is that Intel’s revenue numbers are better than expected only due to external factors. And so the opportunity for growth may have been missed. By the time Intel’s products catch up, end markets simply won’t be as attractive. Again, over half of 2019 sales centered on PC sales which are likely to decline over time.
INTC stock probably is cheap enough to take on that risk. But it can’t keep stumbling on execution. The opportunity is there for Intel to catch up. The company simply must capitalize.
As of this writing, Vince Martin has no positions in any securities mentioned.
