Struggling semiconductor giant Intel (NASDAQ:INTC) announced on Wednesday that its CEO Bob Swan would be stepping down effective Feb. 15, and will be replaced by VMWare (NASDAQ:VMW) CEO and former Intel CTO Pat Gelsinger. INTC stock rose more than 7% on the news.
The positive INTC stock price reaction makes sense. The CEO switch broadly means that better days are ahead for Intel. Why?
In short, because Swan was a financial guy who wasn’t pushing hard enough on technological innovation and engineering advancements. Geslinger is the exact opposite. He’s an electrical engineer by training who will put the focus back on making Intel the world’s most technologically advanced chipmaker — a title Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) have stolen from Intel over the past few years.
With technology back in the driver’s seat, Intel should be able to finally punch back against rising competition, and leverage its unmatched resources to defend its leading CPU market share.
As that happens over the next few years, Intel’s growth trajectory will meaningfully improve. Revenues and profits will start moving higher — not lower. And INTC stock will also start moving higher — not lower.
Here’s a deeper look:
Intel Stock: The Right Move
Intel swapping out Swan for Gelsinger is the right move for the struggling semiconductor giant.
Bob Swan is not an engineer. He’s a money guy. He has a Business degree from Buffalo. He’s forever worked in CFO roles. Indeed, before becoming the CEO at Intel, he was the company’s CFO.
There’s nothing wrong with that, per se. But Intel doesn’t need a CFO as its chief man today. Instead, the company needs a CTO. That’s because Swan — while really good at financial engineering, controlling budgets, and preserving margins — is somewhat “shooting in the dark” when it comes to CPU innovation. This is partially — though not entirely — why Intel has fallen behind AMD in terms of next-gen chip production over the past few years.
What’s the fix?
Push out the money guy. Bring in an engineer. And that’s exactly what Intel is doing.
Gelsinger, unlike Swan, is not a money guy. He’s an electrical engineer by training, with a Master’s in Electrical Engineering from Stanford. He worked at Intel for thirty years throughout the 1980s, 90s and 2000s — and even became the company’s first CTO in 2000.
Under Geslinger’s leadership, Intel will shift its focus back to CPU innovation. That’s a move that could provide a significant lift for INTC stock over the next few years.
Ready to Punch Back
A big part of the bull thesis on INTC stock has been that — whenever this company does finally get it’s act together and push forward on innovation — there is enough firepower here to deliver a big blow to competitors.
Per data from YCharts, Intel has over $18 billion in cash and short-term investment on its balance sheet. Nvidia has about $10 billion in cash and investments on its balance sheet. AMD has less than $2 billion. Thus, Intel has more cash than Nvidia and AMD combined to deploy at CPU innovation.
Even further, Intel has over 110,000 employees on its payroll, most of whom are engineers. Nvidia has about 14,000 employees, and AMD has about 11,000 employees (all as of December 2019). So, Intel has more engineering prowess and manpower than Nvidia and AMD combined to deploy at CPU innovation.
In other words, despite its struggles over the past few years, Intel is still the unmatched 400-pound-gorilla in the CPU space.
This gorilla has been laying dormant for years. But, the change in leadership to the former CTO of Intel could “wake up” the gorilla. If so, the potential implications for INTC stock over the next few years are enormous.
Intel Stock Is Undervalued
Intel stock has been persistently cheap for the past several years because the lack of CPU innovation has resulted in sluggish growth trends, which have kept investors on the sidelines.
This set-up positions INTC stock nicely for a multi-year breakout.
A renewed focus on CPU innovation should reinvigorate the Intel growth machine. Sluggish growth trends will reverse course. Flattish revenue growth will turn into 3% to 5% revenue growth. Declining margins will turn into expanding margins. Anemic profit growth will turn into big profit growth.
As all that happens, sell-side earnings estimates will move significantly higher. Just look at where 2022 earnings estimates are today ($4.42) versus where they were a year ago ($6). Clearly, there’s a lot of runway to EPS estimates to regain lost ground.
At the same time, investors will grow increasingly confident on Intel’s long-term growth narrative. The stock’s multiple will meaningfully expand. There is a lot of runway for meaningful expansion here, too. The current trailing earnings multiple (10.5) is almost 30% below the stock’s five-year-average trailing earnings multiple (14.5).
Big earnings growth plus big multiple expansion equals big gains in the INTC stock price. It’s a winning recipe which should underscore continued strength in Intel stock throughout 2021-22.
Bottom Line on INTC Stock
Intel stock has been a dud for several years. New leadership could change that. If it does, the potential upside in still dirt-cheap INTC stock is pretty sizable.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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