It is becoming increasingly difficult to be positive about the second largest chip maker in the world today, Intel (NASDAQ :). The company is losing some of its largest customers, while smaller competitors are entering their backyards.
This alarming situation has hit the stock badly. It has fallen by around 14% in the last three months and closed yesterday for the third consecutive session of $ 47.75 and has lagged significantly behind the industry benchmark, which remained relatively unchanged in the past quarter
During the same period, the Intel competitor Advanced Micro Devices Inc (NASDAQ 🙂 increased by more than 20%, and added its 80% gains until the end of the year, against the weakness in the entire industry.
And apart from dealing with the cyclical downfall that is hurting the semiconductor industry this year, Intel has some serious problems that it faces. The company faces a difficult competitive environment in an industry that thrives on producing the smallest, most efficient and powerful chips in the highest volumes.
Intel Manufacturing Woes
The latest information from the company suggests that it is falling behind in this race and opening doors for rivals to threaten the near-monopoly in the personal computer and server markets. The biggest concern for Intel investors is that production issues are fairly widespread and cause delays, even with the most established units of the company.
Investors were disappointed last year when Intel confirmed that it would not produce mass-produced semiconductors made with 10-nanometer technology until later this year. Vivek Araya, an analyst at Merrill Lynch, said at the time that delays rivals, including Taiwan Semiconductor Manufacturing (NYSE 🙂 and AMD, offer the ability to & # 39; leapfrog & # 39; ahead of Intel by deploying their own cheaper, better performing chips.
Adding to Intel & # 39; s misery in recent months were the shortages of parts on the company's PC unit. These deficits are expected to continue in the first half of the year, affecting both revenue growth and gross margins. In his first call as CEO in April, Bob Swan lowered the full-year forecast, citing in particular the effects of weak memory prices and weak demand for server processors
Later that week, he told an analyst meeting that the growth of Intel in the "low single digit" series will be over the next three years, with gross margins also coming under pressure as Intel tries to cope with its production problems. to unload.
However, after the company's share price this year lost about 20% from the 52-week peak, Intel shares seem cheap to multiple analysts. With a price-earnings mutation of around 10.68, the lowest ratio since 2015 and a dividend yield of around 2.60%, Intel's valuation seems attractive to some. But there is a big risk for this valuation: another downward adjustment of the revenue forecast may be just around the corner when the company publishes its Q2 earnings issue on July 25.
According to a recent note from research institute Raymond James, the ongoing American-Chinese trade dispute that resulted in a 25% rate on Chinese goods and the American blacklisting of Huawei Technologies Co. likely to lead to a round of earnings alerts around the world. the semiconductor industry.
Bottom Line
Despite the sharp correction, we do not believe it is the right time to bet on Intel stock. There is growing potential for further deterioration in investor sentiment, especially if chip companies cut their earnings forecasts for the second half deeper into their earnings. In our opinion, that could be a more compelling risk-return comparison to gain a long-term position in Intel. Until then, investors have to wait on the sidelines.
