Intel (NASDAQ:INTC) stock was a laggard among the broader semiconductor industry in 2020. That’s a real shame because semiconductors had a great year. But where does INTC stock stand now? Let’s take a look.
Intel fell far behind a few of its notable competitors in 2020, namely Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD). And there were notifications that former partners would soon get into microchips themselves. The result is that Intel trades at under $60 per share, while AMD trades above $90, and Nvidia is around $530.
The price-to-earnings (P/E) ratio tells a better story, though, for Intel. It truly indicates how far the company has fallen relative to its peers. INTC stock carries a 11.62 P/E ratio while NVDA and AMD shares have P/E ratios of 87.17 and 125.8, respectively.
But there is a bullish case forming for INTC stock right now.
Hedging Forward
Back at the end of 2020, on Dec. 20, activist hedge fund Third Point essentially demanded that Intel make wholesale changes to its strategy. The firm submitted a letter to Intel, outlining its failures after establishing a $1 billion stake in Intel.
Markets reacted, sending Intel shares up 5% following the news.
Third Point Chairman Daniel Loeb accused Intel of abdicating its duty as America’s former top chip maker. Loeb also called on Intel to sell some of its acquisitions and to separate design and manufacturing.
By going fabless, Intel could theoretically regain ground it ceded to both AMD and Nvidia. Both U.S. companies utilize manufacturing outsourced to Asia. Intel already outsources some of its production, but a full outsourcing of manufacturing, or going fabless, would be a drastic change for the company. The company has had manufacturing and engineering coupled together for the past three decades.
Intel had already said that it would consider outsourcing some of its more complex chips earlier. And there is widespread speculation that Intel will announce some sort of manufacturing partnership with Taiwan Semiconductor (NYSE:TSM) perhaps as soon as its upcoming earnings call.
In-House Fab Still Has Pros
Intel has been plagued by woes related to its fabrication and manufacturing troubles. Apple (NASDAQ:AAPL) famously dropped them. Chief Engineering Officer Venkata Renduchintala left the company. And the company ceded its position as the top chip maker by market capitalization.
Yet, the company can still make a valid argument for its strategy of maintaining in house fabrication. At the recent Consumer Electronics Show, it announced four new families of chips and that it was ramping up advanced server processor production.
While the chip sector currently is experiencing supply-chain issues, Intel is proving that its strategy does have its benefits and strengths. That’s why markets should expect an upcoming announcement that will equate to increased outsourcing. I don’t believe Intel is going to outsource everything, however.
Security Risk
Third Point CEO Daniel Loeb called Intel’s strategy a matter of national security in his letter. There is certainly some validity to such an argument, and it makes sense to then side with an ally in Taiwanese manufacturer TSM.
Certainly the erosion of Intel as a leading force in American semiconductor design and manufacturing leaves our country weaker. But in my mind that means Intel will likely want to figure out how to solve manufacturing issues within the U.S. borders, and not outside of them by simply relying on more advanced chip manufacturing in Taiwan and South Korea.
I expect a redoubling of efforts in manufacturing capability. Intel is going to outsource, but it will also introduce new efforts to solve problems internally.
The Takeaway on INTC Stock
My impression is that Intel is going to scale down its tight integration between engineering and manufacturing and make announcements very soon. I also believe it will somehow improve internal manufacturing. This could happen concurrently with an imminent announcement of a fabrication partnership with Taiwan Semiconductor.
The other chip manufacturers who burst ahead of Intel now can see that the company wasn’t completely wrong in keeping fab in-house.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.”
