Intel (NASDAQ:INTC) is cheap. There’s no doubt about it. In fact, Intel stock trades at a little over 10x next year’s earnings, and its dividend yields a healthy 2.7%.
The question is whether that’s enough. I’m skeptical it is.
After all, if the bull case comes down to solely that a stock is “cheap,” that’s usually not good news. An investor need only look at Intel’s fellow Dow Jones components like AT&T (NYSE:T), Walgreens Boots Alliance (NASDAQ:WBA) and even Cisco Systems (NASDAQ:CSCO).
All three stocks have been cheap from some time. After underperforming the market for years, even before the novel coronavirus pandemic arrived, they still are.
Sometimes stocks offer opportunities by being cheap. More often, they’re cheap for good reason. Increasingly, Intel stock seems like it falls into the latter category.
When picking the best stocks to buy, I usually like to look for picks that are behind groundbreaking innovations, not just because they’re affordable. And its starting to look like Intel lacks that much-needed “oomph.”
Investors can’t just look at a stock’s numbers. They need to remember that they’re buying a business. That advice applies to both growth stocks and to value stocks like Intel stock.
And the simple fact is that Intel doesn’t seem like a very good business right now. That fact hammered the company’s stock last month, as earnings were greeted with a 16% selloff.
Again, investors have to look past the numbers — because the numbers don’t explain the market’s reaction. In fact, second quarter results nicely topped analyst expectations.
Rather, what spooked investors was Intel’s disclosure of yet another delay in its CPU (central processing unit) development. Intel continues to struggle to advance its manufacturing processes. It was years behind in getting to the 10 nanometer mode. Now, it’s delaying its 7nm launch.
Intel is not executing. And, most importantly, this is not a one-quarter problem. It’s not even a problem that is only in the past. Rather, the inability to execute has the potential to impact Intel’s results going forward as well.
A Lingering Impact
After all, competitors aren’t standing still. In fact, they’re roaring ahead.
CPU rival Advanced Micro Devices (NASDAQ:AMD), with the help of foundry Taiwan Semiconductor (NYSE:TSM), has been at 7nm for some time. In fact, AMD just launched its 7nm Ryzen line, targeting the fast-growing (and high-margin) PC gaming market.
Meanwhile, Nvidia (NASDAQ:NVDA) is targeting Intel’s long-held dominance in the datacenter market. (AMD is a player there as well.) Nvidia clearly has taken market share, and has plenty more to capture as cloud demand increases going forward. It’s one of those companies that’s bound to be a leader in our future.
It would be one thing if Intel was struggling while rivals puttered along. But that’s not the case. Rather, Nvidia and AMD (with help from TSM) are two of the most innovative companies in all of tech, let alone the semiconductor industry.
With each month of delays, Intel is letting those rivals gain a larger technological edge. At some point, its reputation is not going to be enough to keep customers away from those one-time upstarts.
Indeed, Intel’s struggles are a key reason why I continue to recommend both AMD and Nvidia. I’m not alone in being bullish on the growth names in the space. Just last month, Nvidia passed Intel in terms of market capitalization for the first time.
And for investors who believe that perhaps that means the rally has gone too far, Nvidia topped Intel before its earnings disappointment, and ahead of what looks to be blowout fiscal Q2 numbers from Nvidia this week.
Since Nvidia overtook Intel, the gap has only widened. Nvidia has gained 21%, and Intel stock has dropped 16%. There’s no structural reason why that gap can’t continue to expand.
Yes, Intel Stock Is Cheap
Some investors might argue that these worries are priced in. Again, Intel stock trades at 10x forward earnings. AMD and Nvidia are valued five times as richly.
That in turn suggests that Intel’s struggles are “priced in.” Perhaps.
But perhaps not. Again, look at other cheap mega-cap stocks. Almost without exception, they’ve underperformed the market. When a business starts losing market share (like Intel and AT&T), its stock generally starts losing investor confidence as well.
Lost market share alone causes significant problems for a business. Obviously, it impacts revenue. It usually leads to a softer gross margin as well, as the company has to discount to move substandard product, or at least doesn’t have the pricing power it once did.
Operating expenses can rise as the company tries to invest behind the struggling business — or build out a new one to replace it.
Looking at trailing results, or even analyst estimates for next year, is not going to capture the true risk from a company losing out to competitors. And that risk is even higher in the cutting-edge chip space.
That’s the risk I worry about with Intel stock. And as ‘cheap’ as it might look, it’s far too optimistic to argue that risk is fully priced in.
But even though I suggest caution with Intel, I want to quickly bring your attention to another stock that’s actually worth your money. It’s bound for long-term success that’s perhaps even more impressive than the likes of Nvidia, only the space it focuses on is mobile communication.
While tech titans like Apple and Samsung helped lay the foundation for our hyper-connected society, this company stands to lead a technological revolution that will forever change communication on a global scale.
As InvestorPlace’s chief technology analyst, I’ve worked feverishly with our veteran research team to identify the best stocks to buy. Over the years, InvestorPlace’s research has helped millions get ahead of the curve. Our subscribers have enjoyed massive gains in tech titans like Apple (19,954% gain) and Intel (12,547% gain) … just to name a few.
Now, I’m ready to share with you the stock behind the next big development in communication. The company has already inked deals with mobile phone titans Apple, Samsung and LG. But it’s bound to become its own king with an approach to mobile interaction that we’ve never seen before.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.