A down in the dumps stock like Intel (Intel Stock Quote, Chart, News NASDAQ:INTC) may look like a bargain but don’t be tempted, says portfolio manager Christine Poole, who says the semiconductor company’s future may not be so bright.
Intel’s share price, coming off a positive year in 2019 where it rallied to finish up 28 per cent, has been a different story in 2020. The stock dropped hard with the wider market pullback in February and March but unlike plenty of other names in the tech field, INTC has failed to regain that lost ground and is on track this year for double-digit losses.
The market seems less sure of Intel’s days ahead than perhaps any time in recent memory, as the storied chipmaker has seen its market share get whittled down over the years.
The stock dropped sharply with its last two earnings reports, for example, even as the company matched or beat expectations along the way.
Intel fell ten per cent in July after second quarter financials which surprised with $19.73 billion in revenue compared to analysts’ consensus average at $18.55 billion and earnings of $1.23 per share compared to the expected $1.11 per share. Yet it was a weaker-than-expected guidance, calling for $1.10 per share in earnings for its third quarter compared to the consensus forecast of $1.14 per share, that was blamed for the pullback in the stock. (All figures in US dollars.)
Similarly, Intel fell in October even as earnings came in on par with the Street at $1.11 per share (and besting management’s own call), while revenue was better than called for at $18.33 billion compared to the expected $18.25. But investors seemingly focused on a seven-per-cent drop in the company’s Data Center Group which generated $5.91 billion in revenue, while enterprise and government revenue was down a full 47 per cent.
Potentially more foreboding was a release by Apple of new iterations of its MacBook which featured the company’s M1 chip as opposed to Intel’s microprocessors, a sea change after more than a decade of Intel chips running in Apple desktops and laptops. Going forward, Apple will use mobile-friendly ARM architecture instead of the x86 CPU architecture used by Intel.
The lack of momentum from Intel is noticeable, says Poole, who is CEO and managing director at GlobeInvest Capital Management.
“It’s hard because Intel was kind of the dominant player in the semiconductor space, and we’ve seen one of its competitors AMD getting much more competitive and starting to gain more market share,” said Poole, who spoke on BNN Bloomberg on Monday.
“Intel supplied the chips for the Apple MacBooks and we’ve seen Apple bring that in-house so that’s another loss of business,” Poole said. “So, generally speaking, semiconductors is a very cyclical [space] and, Intel, their share is almost theirs to lose over time because they were so dominant.”
“So, even though I think the valuation on Intel is not excessive it’s not really a growth technology stock anymore. I would not be buying it,” Poole said.
Another big move is expected in the near future for Intel, which is planning on contracting out its chip manufacturing, with Taiwan’s TSMC, who also makes Apple’s chips and AMD’s.
Intel CEO Bob Swan spoke in his third quarter 2020 comments on the company’s prospects going forward, including on taking up an external foundry for its chips.
“As I look to the next several years of products, I’m excited about the products we have coming,” said Swan. “We are now sampling our 2021 client CPU, ‘Alder Lake,’ and will be sampling our 2021 data center CPU, ‘Sapphire Rapids,’ later in the fourth quarter. Both will deliver significant capabilities enabled by our six pillars of innovation, including our Enhanced SuperFin technology. We have another great lineup of products in 2022, and I’m increasingly confident in the leadership our 2023 products will deliver on either Intel 7nm or external foundry process – or a combination of both. I look forward to providing a further update in the January call.”
Vivek Arya, analyst for Bank of America Securities, lowered his rating on Intel after the company’s latest earnings, saying Intel is facing big challenges in the near term, including manufacturing problems involving their current generation products, stronger competition from Advanced Micro Devices on PCs and Nvidia.
Intel is also dealing with a shift in technology towards the cloud, Arya said.
“Even though the demand for PCs and servers is strong, the mix is weak and unfavourable for Intel because it’s weaker on the enterprise side where they’re usually very profitable but it’s stronger on the cloud and the consumer side where they are less profitable because it’s just a lot more competitive area,” Arya said to CNBC on October 23.
Arya downgraded his rating on Intel to “Underperform” and dropped his target from $60 to $45 per share, implying a projected 12-month return of negative 17 per cent.