Opinion: I’ve always pounded the table on game-changing companies. Now I found myself buying Intel stock
This may come as a surprise to those of you who follow me on MarketWatch, as I focused early on on finding breakthrough companies and keeping them there, usually forever.
Intel is a company that is probably on the verge of taking market share for the first time in at least half a decade in the world’s most important tech industry: computer chips.
The semiconductor industry faces a potential decade-long supply constraint problem that this company can solve, giving it a potential trillion-dollar side business, plus another one or two. .
And most important is the valuation: Intel is trading at a forward P/E ratio of 14.2, compared to a forward P/E ratio of 26.1 for rivals Advanced Micro Devices Inc. AMD,
and 46.7 for Nvidia Corp. NVDA,
Intel also has a dividend yield of almost 3%.
Two other comparisons — the SPDR S&P 500 ETF SPY,
trades for 19.7 times forward earnings and the Invesco QQQ Trust QQQ,
(which tracks the Nasdaq-100 NDX index,
) is trading at a forward P/E of 26.
Most investors think Intel is boring. I agreed until recently. INTC has been dead money for years. I imagine that with Intel having traded in the low teenage P/E and with 2%-3% dividends over the past 10 years while underperforming just about every other semiconductor stock in on the planet, just about every value investor has churned in and out of the stock at some point.
We can say the same for analysts on the sell side, most of whom have at one time or another upgraded INTC only to be disappointed when the stock went nowhere. In fact, Intel stock is still well below its dot-com bubble peak, when it reached a closing high of $74.88 on August 31, 2000.
Intel’s long-term problem
Intel’s boring old CPU semiconductor business lost market share to AMD and self-designed chips by Apple Inc. AAPL,
and Google (owned by Alphabet Inc. GOOG,
) and others for years. The company had pretty much become an IBM- or GE-type financial engineering company with a declining annuity business, boring CEOs, and no risk taking.
Turn the big ship
But then they asked this guy to run the business. As the Intel site says:
CEO Pat Gelsinger “began his career in 1979 at Intel, becoming its first chief technology officer, and also serving as senior vice president and general manager of the Digital Enterprise Group. He managed the creation of key technologies for industries such as USB and Wi-Fi. He was the architect of the original 80486 processor, led 14 microprocessor programs, and played a key role in the Intel Core and Intel Xeon processor families, which allowed Intel to become the main supplier of microprocessors.
Yes, Gelsinger created the world-changing x86 chip platform. He’s brilliant and has a track record to prove it. I love betting on shine (see Always bet on shine and revolution or Trade Alert: Betting on shine (and EV)).
In the short term, everything points to the company’s latest Alder Lake chipset clearly outperforming AMD’s latest laptop and desktop chipset (see Core i9-12900HK review: Intel’s Alder Lake laptops). Crush the Competition or Intel’s Alder Lake Mobile 12900HK Gets Praise in Early Reviews).
Intel’s latest chips seem to be cheaper and better than the competition and that’s the kind of thing that can boost gross margins, growth rates and possibly P/E multiples.
There is also the Sapphire Rapids chipset which is the fourth generation of Intel’s Xeon Scalable Processor branded data center server processor. According to Intel, it “will deliver the biggest leap forward in data center processor capabilities in a decade or more.”
INTC shares would likely double if the company took a significant stake in these two companies and would likely be at least slightly above these current highs of $40.
Attractive risk/reward balance
One of the reasons I like the risk/reward of this trade so much is that the downside seems limited to around 20% or so, while you have a good chance of the stock doubling down on market share gains .
And then you have the virtual call option on the potential that Intel’s MobileEye autonomous vehicle technology, which certainly comes close to solving the problem with Tesla Inc. TSLA,
Waymo and maybe a few other companies.
And most importantly, it’s the virtual call option on manufacturing, making chips for other companies, that makes Intel so compelling.
Taiwan Semiconductor Manufacturing Co.TSM,
Samsung Electronics Co. 005930,
and Intel will try to build new semiconductor factories to meet the huge demand for chips in everything from cars to computers to phones, shirts, clothes, shoes, doorknobs, streetlights and roads – probably just about anything but toothpaste.
The semiconductor industry just crossed half a trillion dollars in annual sales and will continue to be a mostly secular growth story for the next decade or two. Intel has asked the US government and state governments to help fund what will likely end up being nearly $100 billion invested in new factories over the next five years. These fabs could create a trillion-dollar valuation if Intel pulls it off and if demand for semiconductor chips continues to grow as it has been.
Intel finally has real and amazing potential catalysts and the potential to take market share for the first time in years, even if the stock market hates it. Intel’s investment setup here kinda reminds me of when I was hammering the table to buy Tesla at $45 per adjusted share in 2019 because, like Intel now, Tesla was questioned by investors and analysts even if the company had finally set up is preparing to win with new products and take market share, with vehicles and new factories partially paid for by governments.
My friends’ responses since I started buying Intel recently have been similar to when I started buying/beating the table on Tesla in 2019 or even when I started buying Apple in 2003: shock, exasperation or confusion.
This Intel investment, like anything, comes with risk. But the upside potential and likelihood means this is the first time since Tesla in 2019 that you’ve seen me beat the table on a new idea. Nothing is easy there and Intel has a lot of work to do to realize that potential, so I will stay balanced even though I made INTC one of the top three positions in my personal account and in the hedge fund .
I plan to buy more on any weakness in both places.
Be careful, as always.
Cody Willard is a columnist for MarketWatch and editor of the Revolution Investing newsletter. Willard or its investment firm may hold or plan to hold the securities mentioned in this column.