Semiconductor stocks have performed exceptionally well in 2020. The VanEck Vectors Semiconductor ETF (NYSE:SMH) is up 21% year-to-date. But Intel (NASDAQ:INTC) stock is down 19.5% in 2020 and for good reason. Despite massive scale advantages and a huge market share advantage, INTC stock has repeatedly found a way to snatch defeat from the jaws of victory when it comes to producing its 7 nanometer chips.
I still believe INTC stock is a compelling long-term value. I still believe Intel has superior resources and scale advantages.
However, Intel management has shot itself in the foot so many times in the past couple of years that its sneakers look like swiss cheese. It’s extremely difficult to buy shares of a company that can’t seem to get anything right.
Bad News for INTC Stock
If there is one-word investors can associate with Intel in the past couple of years, it’s “delay.”
First, Intel struggled to produce its 10nm chips. While Intel was fumbling with its 10nm production, competitor Advanced Micro Devices, Inc. (NASDAQ: AMD) was gaining market share each quarter.
But Intel investors were hopeful that Intel would make up for its 10nm missteps with its 7nm rollout. AMD is already shipping its own 7nm chips. Intel investors also had an excuse for its delays.
After all, Intel has always produced its own chips in-house, which helps boost profit margins. AMD, on the other hand, contracts its chip production with third parties, including GlobalFoundries and Taiwan Semiconductor (NYSE:TSMC).
So INTC stock investors got a double gut-punch in July when Intel made two major announcements regarding its 7 nm chips. First, the company found a flaw in its manufacturing process. The 7nm chips are now, you guessed it, delayed. To add insult to injury, Intel also said it may be forced to rely on third-party production.
Meanwhile, AMD is raking in the cash and eating up the market share. It’s also developing its next-generation 5nm Genoa server chips.
Things have gotten so bad at Intel that Bank of America analyst Vivek Arya downgraded the stock from “buy” to “neutral” in July. Intel had previously been a top semiconductor stock pick for Aya. He now says there is simply too much uncertainty associated with the company.
“While AMD has not given a timeline for its 5nm Genoa server product (INTC 7nm equivalent), we expect PC/server customers to provide more sockets to AMD and help it drive share from 17%/10% in PC/server now to its 20%/25% peak from back in 2006,” Arya said.
Arya says he previously wasn’t too concerned about Intel’s delays given the company was still reporting solid fundamental numbers. But one of the reasons Ayya was dismissing Intel’s 10nm issues is that he assumed the company would right the ship with its 7nm products.
“However, 7nm delay coupled with uncertainty about whether delays could be >6 months will matter, at-least enough for customers to offer AMD more [market share] just for risk mitigation even if INTC [continues] to keep its dominant 70%+ share, in turn keeping a lid on the stock,” Arya said.
Arya also cut his price target for INTC stock from $70 to $62.
How to Play It
Despite Intel’s disastrous production issues, there are still plenty of things to like about the stock. Intel still has size and scale advantages over competitors. It still has the capacity to produce its own chips, if it can get back on track at some point.
INTC stock is also a much more attractive valuation compared to AMD and Nvidia (NASDAQ:NVDA). Sure, AMD and Nvidia are growing revenue at a much faster pace, but Intel’s revenue was up 19.5% last quarter.
In fact, despite the challenges, Intel’s revenue growth is on track to outpace the average growth rate within the semiconductor group for the third consecutive year in 2020, according to Arya.
But even when growth rates are factored in, Intel trades at a price-to-earnings-to-growth ratio of just 1.0. That valuation is a steep discount to AMD at 4.7 and Nvidia at 5.0.
Finally, Intel pays a 2.7% dividend. The company has also recently said it plans to resume its massive buyback program that it suspended due to the pandemic.
At this point, I don’t blame Arya or any other INTC stock investors for throwing in the towel. I still think expectations are so low for Intel at this point that it’s a safer, better bet than AMD and Nvidia given their respective valuations. But investors may want to stay on the sidelines for now until Intel management shows it can get something right for a change.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.