This may be a surprise for those of you who have been following me on MarketWatch, as I have focused on finding Revolutionary companies early on and holding on to them, usually forever.
Intel is a company that is probably about to take market share for the first time in at least half a decade in the world’s most important technology industry: computer chips.
The semiconductor industry is facing a potential decade-long supply-constraint problem that this company can fix, giving it a potential trillion-dollar side business along with maybe another one or two.
And the kicker is the valuation: Intel is trading at a forward price-to-earnings ratio of 14.2, compared with a forward P/E ratio of 26.1 for competitors Advanced Micro Devices Inc.
AMD,
and 46.7 for Nvidia Corp.
NVDA,
Intel also has a dividend yield of close to 3%.
Two more 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 Index
NDX,
) trades 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 would imagine that with Intel having been trading in the low teens P/E and with dividends of 2%-3% over the last 10 years while vastly underperforming just about every other semiconductor stock on the planet, just about every value investor has churned in and out of the stock at some point.
We can say the same thing about the sell-side analysts, most of whom at one point or another have upgraded INTC only to be disappointed when the stock basically went nowhere. In fact, Intel’s stock is still way below its dot-com bubble peak, when it hit a closing high of $74.88 on Aug. 31, 2000.
Intel’s long-term problem
Intel’s boring, old CPU semiconductor business has been losing market share to AMD and self-designed chips by Apple Inc.
AAPL,
and Google (held by Alphabet Inc.
GOOG,
GOOGL,
) and others for years. The company had pretty much become an IBM-like or GE-like financial-engineering firm with a declining annuity business, boring CEOs and no risk-taking.
Turning the big ship around
But then they got this guy to head up the company. As Intel’s site puts it:
CEO Pat Gelsinger “began his career in 1979 at Intel, becoming its first chief technology officer, and also serving as senior vice president and the general manager of the Digital Enterprise Group. He managed the creation of key industry technologies such as USB and Wi-Fi. He was the architect of the original 80486 processor, led 14 microprocessor programs and played key roles in the Intel Core and Intel Xeon processor families, leading to Intel becoming the preeminent microprocessor supplier.”
Yes, Gelsinger created the x86 chip platform that changed the world. He is brilliant and has a track record to prove it. I love to bet on brilliance (see Always bet on brilliance and revolution or Trade Alert: Betting on brilliance (and EV)).
Near term, all indications are that the company’s latest chipset, the Alder Lake is a demonstrably better performer than AMD’s latest laptop and desktop chips (see Core i9-12900HK review: Intel ‘Alder Lake’ laptops crush the competition or Intel’s Alder Lake Mobile 12900HK Gets High Praise in First Reviews).
Intel’s latest chips look like they are cheaper and better than the competition and that’s the kind of thing that can boost gross margins, growth rates and eventually P/E multiples.
There’s also the Sapphire Rapids chipset that is the fourth generation of Intel’s Xeon Scalable Processor brand data center server CPU. According to Intel, it “will offer the largest leap in data center CPU capabilities for a decade or more.”
INTC’s stock would likely double if the company were to take any meaningful share in those two businesses and would likely be up at least a bit from these current high $40s levels.
Attractive risk/reward balance
One of the reasons I like the risk/reward of this trade so much is that the downside appears limited to about 20% or so, while you have pretty good odds that the stock could double on market-share gains.
And then you have the virtual call option on the potential that Intel’s MobileEye autonomous vehicle technology, which is certainly getting closer to solving the problem along with Tesla Inc.
TSLA,
Waymo and maybe a couple other companies.
And most importantly, it’s the virtual call option on the fabrication business, making chips for other companies, that makes…
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