“Laggard” Intel is looking interesting, John Zechner says

Is microchip giant Intel Corp (Intel Corp Stock Quote, Chart, News, Analysts, Financials NASDAQ:INTC) a buy right now? The stock is below its all-time highs and trails its competitors so far in 2021. And investors looking for a play in the semi space could very well benefit from a second-half surge as Intel looks to make good on its turnaround promises.

“Intel has been a laggard,” says John Zechner, portfolio manager at J. Zechner Associates, who spoke on BNN Bloomberg on Thursday. “There’s a new management in place and they obviously have lost a lot of ground in the processor market to AMD in the past few years, certainly on the desktop/laptop [market] going forward, so that’s been a bit of a difficulty for them.”

“I always hate to say, ‘Let’s buy value in technology or value in growth’ — that’s always seemed like a recipe for disaster. But quite honestly, I’m okay with Intel here,” he says. “The valuation support, the chance for turnaround, the fabs have some value, so I’d be okay owning it.”

Intel has been a disappointment over the past year and a half, at least compared to many Big Tech names, including those from its own industry. Where Intel finished 2020 down 17 per cent and is now down six per cent for the past 18 months, AMD is up 96 per cent for the past 18 months and Nvidia is up an incredible 245 per cent over that span.

Still the world’s largest chipmaker, Intel has lost market share in recent years to competitors as well as to tech names like Apple and Google who are taking chip manufacturing in-house. Last year, Apple ended a long-standing relationship with Intel and has switched to its M1 chip for Mac products.

Intel has vowed a return to glory through major investments in R&D and manufacturing, dropping CEO Bob Swan early in 2021 after a two-year run and hiring Pat Gelsinger as his replacement.

“We have the opportunity to take this great icon of a company, this company that has been crucial to every aspect of technology, and have it be that leader again into the future,” said Gelsinger on his hiring in February. “Because I believe that Intel has a treasure trove of technologists, of technology, and ultimately its core DNA is being that technology leader for the future.”

Intel’s share price had a big run from late last year into early April, but the stock has faltered more recently, leaving investors wondering whether the stock and company can deliver.

Cowen analyst Matt Ramsay has said Intel is certainly off to a good start in its turnaround.

“With Gelsinger coming in as the new CEO, that was step one in the turnaround with technically-focused leadership. Step two is to get the seven-nanometer processor right and step number three is get the architecture right, and we’ve seen progress on all of those fronts,” said Ramsay, speaking on CNBC in April.

Cowen put an $80 12-month target on Intel, which at the time represented a projected return of 44 per cent.

“There’s no question the competition is tough,” Ramsay said, “but we just felt that the stock was being priced as a perpetual [market] share loser and at a 50-per-cent discount to the stocks, shares were just too cheap given the catalysts that were ahead. And the chances for significant government support as they move towards reinvesting in their own manufacturing footprint.”

Intel’s latest quarter, its fiscal Q1 2021 delivered in April, showed the company’s revenue down one per cent year-over-year to $19.7 billion, while gross margin dropped 5.4 percentage points to 55.2 per cent and adjusted EPS was down one per cent to $1.39 per share. Analysts had been expecting $17.9 billion in revenue and $1.15 per share in adjusted earnings.

“First-quarter revenue exceeded January guidance by $1.1 billion led by continued, strong PC demand. PC unit volumes were up 38 percent year-over-year, and notebook volumes set a new Intel record,” Intel said in a press release.

“The company also saw initial recovery of Enterprise and Government sales in the Data Center Group (DCG). Intel also achieved better-than-expected revenue in Internet of Things Group (IOTG) and Mobileye, and Mobileye set a new revenue record in the quarter,” Intel said.

For Zechner, while he sees the semiconductor space is good for your portfolio, he ultimately favours a sector-wide investment through an ETF such as Veneck Vectors Semiconductor ETF rather than investing in one particular name like Intel.

“My preference is to have a broader play in the semiconductor [space] because semiconductors to me are sort of the new industrials, the new growth area of industrials, and you can’t be without this group,” Zechner said. “But sometimes you want to mitigate your risk a little bit.”