Take a pass on Intel, this portfolio manager says

Intel Corp (Intel Stock Quote, Chart, News: NASDAQ:INTC) saw its share price hit a record high earlier this month, but growing competition in the semiconductor space will give the company a rough ride going forward, says Colin Stewart, CEO and portfolio manager at JC Clark, who argues that Intel’s price has run up too high.

Tech giant Intel’s share price has climbed 15 per cent on the year, buoyed by strong revenue growth and earnings, but the second half of 2018 may turn out differently for the chip maker. Recently, Northland Capital downgraded its rating for INTC to “Underperform,” based on competition from rivals Nvidia and Advanced Micro Devices (AMD).

“Workloads in Data Centres are shifting to AI. This we believe is increasing the use of GPU [made by AMD and Nvidia] and ASICs and reducing the importance of CPUs,” says analyst Gus Richard of Northland in a note to clients on Monday. “We expect server growth to slow in Q3. … After Q2 earnings no clear catalyst this year.”

News on the international trade front could be gloomy for Intel, as well. While processors and memory chips had previously been left off the United States’ list of Chinese products to be subject to tariffs, a new list released last week included chips and processors, both of which Intel sells to Chinese manufacturers and would therefore be hit by tariffs upon reentry into the US.

More reason to be careful with you investment dollars, says Stewart, who spoke to BNN Bloomberg about Intel and the semiconductor space.

“We aren’t generally involved in the chip stocks,” he says. “I think they’ve been great investments over the last couple of years and the stocks have done well. But they’re certainly not cheap on a valuation basis and I think that the semiconductor space in general is a very competitive business.”

“I’ve heard that with all the development of semiconductor manufacturing in China that this is actually a big threat to the United States and that this is one of the specific industries that [President Trump] is trying to protect by going after China so hard on the tariff side,” Stewart says. “So I think that shows some of the vulnerability of some of the dominant positions of the incumbent players like an Intel or Nvidia in this market.”

Another issue facing Intel is its growing reliance on revenue generated from sales to data centres and server farms, which grew at a 24 per cent clip in the company’s last quarter. Unfortunately, however, those server sales are expected to decline over the second half of 2018.

“It’s a competitive commodity-type business over time,” says Stewart. “We do invest in technology companies, but semiconductors are not our favourites. It’s not something that I’d advocate buying at these levels, after a fairly good run and a pretty steep valuation.”