Intel Is a Reasonable Value Play but Faces Threats

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Is Intel (NASDAQ:INTC) stock a great investment going through a short-term downswing? Or is Intel following the footsteps of General Electric (NYSE:GE), Eastman Kodak (NYSE:KODK) and other formerly great American industrial titans that subsequently lost their way? With the latest delays in Intel’s long-awaited next-generation chipset, Intel stock suffered one of its steepest falls of the past decade.Sign of Intel at entrance of The Intel Museum in Silicon Valley
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Still, contrary to the current downbeat mood, Intel has actually been reasonably successful.

Did you know that Intel has grown revenues and cash flow at 7%/year and 9%/year compounded, respectively, over the past decade?

Earnings are up too; just since 2015, Intel’s earnings per share have doubled. Intel also pays a well-above-average dividend for the tech sector.

So there’s a spirited bull/bear debate around INTC stock now. Let’s dive in.

What’s Gone Wrong

Intel is clearly on a losing streak at the moment. So let’s start by looking at the company’s faults. The most pressing issue is that Intel has fallen behind AMD (NASDAQ:AMD) in technological leadership in the core computing chip market. At first, it appeared that this was just a short-term blip. Historically, AMD has pulled ahead of Intel briefly on several occasions, but Intel always caught up fairly soon.

This time around, however, Intel may be losing share on a more extended basis. Earlier this summer, Intel announced major delays in its 7-nanometer chip architecture. With that, Intel will be even slower in launching the next generation of products that are supposed to lift it back to tech leadership in its core market.

In turn, this has reinforced broader concerns about Intel’s strategic vision.

It’s no secret that the company has long relied on its core CPU market to generate prodigious cash flow. However, what comes after that? Laptop computing is already a mature no-growth market, and now Intel is losing share within that.

It also faces longer-term challenges as chips continue to get faster in general. The appeal of a unified chip-set is growing, which exposes Intel’s weaker graphics chips to stiff competitive forces from the likes of Nvidia (NASDAQ:NVDA).

More broadly, Intel has long had its own ecosystem, and up until now, that’s worked well. However, Intel will struggle to justify charging premium pricing if it can’t keep up its tech superiority.

Nowadays, Taiwan Semiconductor (NYSE:TSM) has its own 7 nanometer design. This offering has been highly successful, and Taiwan Semi counts AMD, Apple (NASDAQ:AAPL), and Qualcomm (NASDAQ:QCOM) among its key customers.

Bears are starting to suggest that Intel’s shortcomings are turning into a more permanent slide in its competitive position.

Can Intel Still Innovate?

There are two main ways that a large company like Intel can develop compelling new products. It can invest in its own research and development. And it can acquire other businesses. Intel does both of these heavily.

On the acquisition front, Intel doesn’t mind making a big splash.

In 2015, Intel paid almost $17 billion for Altera, a maker of specialized programable logic devices. It soon dropped another $15 billion on self-driving vehicles chip developer Mobileye. The Altera acquisition hasn’t been a failure, but it didn’t really move the needle in terms of cross-selling or expanding Intel’s overall market much. As for Mobileye, the jury is still out on that one, though so far, it looks like a steep price tag in return for what Intel got with that deal.

Organically, Intel far outspends rivals on research and development. Intel spends around $13 billion annually on R&D, compared to $2.9 billion for Nvidia and $1.7 billion for AMD. Bears can argue that these funds are not being well-allocated.

Intel’s heavily-publicized efforts in the memory chip arena haven’t changed the landscape much. Similarly, Intel’s internally designed graphics chips haven’t caused major concerns for Nvidia’s shareholders.

The Verdict on Intel Stock

Historically, it’s been a good bet to buy Intel whenever AMD pulled ahead in the tech arms race for a product cycle or two. More often than not, the company with a huge R&D budget is going to come up with good, and often excellent, products.

This time could be different. Admittedly, Taiwan Semiconductor is building a rather nice alternative to the Intel world. It’s possible that Intel will lose its core leadership in coming years. Just because Intel has always fended off challenges in the past doesn’t guarantee future success.

Still, the odds favor the bulls here. At this point, Intel is selling for just 10 times forward earnings, and that’s even with analysts forecasting an earnings decline in 2021 due to the current chip delays. If Intel can get back on track with the next generation offerings in 2022, earnings should top $6/share, which would put the stock at 8 times those normalized earnings.

In the meantime, Intel stock also offers an almost 3% dividend yield to reward shareholders.

In this frothy market, Intel is still a reasonable value play. And if it can wrestle its leadership position back from AMD, there could be sizable capital gains coming as well.

Ian Bezek has written more than 1,000 articles for and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, Ian Bezek owned QCOM and INTC stock.

The post Intel Is a Reasonable Value Play but Faces Threats appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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