Intel (INTC) has been dead money for the past four years as it struggled in the hot semiconductor sector. But in today's market this is a good thing as froth gets squeezed out of over-loved and over-owned stocks.
The company has been out of favor as market-share losses have chipped away at its dominance in PCs and servers. Plus, slow-to-market microprocessors have impacted Intel's product roadmap and competitive position, exposing management miscues.
After years of missteps, there are signs that Intel is at the beginning stage of a recovery. The new CEO, Pat Gelsinger, has laid out a competitive product roadmap over the next few years.
Mobileye Catalyst
The shares may have a catalyst by mid-year when Intel is scheduled to IPO their Mobileye unit. In 2017, Intel purchased the autonomous driving company for $15 billion, and expects to float a stock offering that values the unit at $50 billion.
Mobileye has signed numerous deals with carmakers, and revenue has tripled under Intel's ownership. The potential value of the unit could sharpen investors' focus on the sum of the parts; granted, Mobileye's valuation may prove lower than Intel expects.
A highly awaited analyst day on Feb. 17 could shift the narrative toward a cohesive turnaround story. This year's Wall Street expectations are low in anticipation of lower profit margins. The derisked numbers -- $3.70 in EPS on flat revenues, down from $5.30 last year -- can be considered a trough earnings year ahead of a resumption of growth in 2023.
The stock trades for slightly under 3x sales and 13x expected EPS with a 2.6% dividend yield. No froth in those numbers.
Cowen's semiconductor analyst has an optimistic take: "Despite the share loss challenges, we believe the company is taking appropriate steps/investment to turn the battleship, reaccelerate technical timelines, and slow share loss." The firm believes if Intel executes, they can reinvigorate its competitiveness in time.
There are many skeptics as well. Keybanc downgraded the shares earlier this year as they saw limited catalysts on the horizon and headwinds in the cloud, especially with the delay of the Sapphire Rapids chip, Intel's next-generation server processor. Yet, the firm noted, "We have been encouraged by the actions taken by INTC management, which involve investing aggressively in R&D and Capex and putting forth an ambitious plan and roadmap that not only brings the company back to parity with AMD, but also regains leadership."
CHIPS Ahoy
Part of the bear-case scenario entails Apple (AAPL) now producing their own computer chips, replacing Intel's. Although this represents only a small component of Intel's PC business, it's a high profile loss.
Congress is working on passing the CHIPS Act, funded with around $50 billion, to scale up semiconductor manufacturing in the United States. Intel stands to benefit from subsidies and tax breaks to construct chip fabrication plants. A planned announcement in Ohio is expected Friday for two advanced semiconductor fabs worth $20 billion.
Intel's turnaround will take time. The company will have a solid fundamental base to build on as it undergoes a recovery. For now, the near-term picture looks solid for demand and expectations are low. Earlier this week, Citigroup's analyst put a positive catalyst watch on the shares, citing channel checks that indicate a recent surge in enterprise demand and notebook orders.
With its reasonable share price, engineering talent, product breadth, and solid new management, Intel can stage a turnaround that most on Wall Street are not positioned for.
Intel is one to own for the patient value investor.
