Semiconductor stocks just had a great year —with the notable exception of industry giant Intel (Intel Stock Quote, Chart, News, Analysts NASDAQ:INTC), that is, which dropped 17 per cent in 2020. And while better times may be ahead for the company, the pastures may be greener with other sector leaders, says portfolio manager Brendan Caldwell, who likes both Qualcomm (Qualcomm Stock Quote, Chart, News, Analysts NASDAQ:QCOM) and Broadcom (Broadcom Stock Quote, Chart, News, Analysts NASDAQ:AVGO).
2020 was definitely A Tale of Two Intels, in a year which saw the chipmaker deliver more than respectable quarterly numbers, often surprising with stronger-then-expected earnings and revenue in the challenging COVID-19-related environment. Yet, at the same time, the market seemed to paint a different picture of the company, one focused on potential chinks in the armour, a transitional period and rising competition in the chip space.
A report surfaced last month that longtime Intel customer Microsoft had plans to bring its semiconductor designing in-house, news which promptly dropped INTC’s share price about ten per cent. Last year also saw Apple break with Intel, further troubling investors about the company’s growth prospects, while Intel’s management seemed to consistently underwhelm in its guidance. For the upcoming fourth quarter results, for instance, Intel expects to see revenue drop by 14 per cent.
Overall, in a year where chip companies posted returns of over 50 per cent on average, Intel was a clear laggard, enough to bring out the critics, one of note being Daniel Loeb of Third Point, which reportedly took a $1-billion position in Intel only recently. In a Reuters report at the end of December, Loeb was said to have penned a letter to Intel’s board urging the company to explore strategic alternatives including outsourcing more of its manufacturing.
Loeb said the company was losing out in the human capital race as chip designers were flocking to competitor companies like Samsung and Taiwan Semiconductor Manufacturing.
“Without immediate change at Intel, we fear that America’s access to leading-edge semiconductor supply will erode, forcing the U.S. to rely more heavily on a geopolitically unstable East Asia to power everything from PCs to data centers to critical infrastructure and more,” said Loeb in his letter.
Intel, which has a market cap of $204 billion, said in a statement that it “looked forward to engaging with Third Point LLC on their ideas” on enhancing shareholder value. Intel’s share price rose on news of the letter.
Caldwell, CEO of Caldwell Investment Management, said while Intel is likely a solid stock to own, investors may do better off in the space through other names.
“Intel, of course, was one of those classic chip manufacturers that really got the NASDAQ exchange going 40 years ago when the New York Stock Exchange wouldn’t list those upstart companies,” said Caldwell, speaking on BNN Bloomberg on Thursday. “Our preference would be more for some of the chips that are used in in different areas rather than Intel. Intel has done well but something like a Qualcomm or Broadcom —these are the chip manufacturers that we actually own in our portfolios.”
“I do think that the demand for technology and the demand for chips is going to be strong and Intel’s going to continue to do well, along with the sector. But I think a couple of these other names that we own will probably do better,” he said.
“You’re not going to do badly in owning Intel —I’ve got clients that own it and it’s going to be fine— but I think a couple of the other names might do better going forward,” Caldwell said.
Morgan Stanley analyst Joseph Moore is also hesitant about Intel’s growth prospects in 2021, where the analyst currently has an “Equal Weight” rating on the stock and a $60 per share target. Moore said investor confidence in the name is important but that customer confidence in the company’s products and roadmap for the future is a more central issue.
“While we do see paths to value creation relative to the current path, the challenges in 2021 still look substantial,” said Moore.
Raymond James analyst Chris Caso reiterated his “Market Perform” rating for Intel after its last quarterly earnings, saying the company urgently needs a plan to right the ship.
“We still find it difficult to be too negative near-term due to widely negative sentiment and before details of the recovery plan are revealed,” said Caso.
A similar sentiment came later last year from portfolio manager Nancy Tengler of Laffer Tengler Investment, who in conversation with CNBC said while Intel’s quarterly numbers seem acceptable, the question mark of its chip manufacturing business still lingers and investors should consider whether owning Intel during this transition period is the right idea.
“What investors have to ask themselves is the opportunity cost — is it worth it? There are plenty of other good places to be. We do not own this in our growth strategies [portfolio]. We do own it in our income strategies and we’re going to take a fresh look at it because enough already,” said Tengler.
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