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Intel (NASDAQ: INTC) It was once considered a stable technology stock that generated reliable returns. Its position as the world’s largest manufacturer of x86 CPUs for PCs and data centers gave it ample headroom, and its strong cash flow growth comfortably funded its large buybacks and dividends.
However, Intel shares fell 15% this year, as the Philadelphia Semiconductor Index rose 50%. Let’s look back to see why Intel underperformed the industry overall, and see if it will fare better next year.
How Intel lost its mojo
For decades, Intel led the CPU market by following “Moore’s Law,” a prediction established by its co-founder Gordon Moore to double the number of transistors in the same area of silicon every two years. This was the foundation of the two-year “tick-tock” cycle that powered Intel’s business for half a century.
Image source: Getty Images.
At each “tick” launch, Intel downsized a chip to a smaller size. In each “tock” update, the chip was updated but the size remained the same. However, it became increasingly difficult for Intel to make smaller chips in its own foundry, and Moore’s Law faded in recent years.
When Moore’s Law ended, the Intel foundry was left behind TSMC (NYSE: TSM), the world’s largest chipmaker, in the “process race” to create smaller, more energy-efficient chips. As a result, the “fabless” chipmakers that outsourced their chips to TSMC, including AMD (NASDAQ: AMD) and Apple, which recently replaced Intel’s Mac chips with its own silicon, began producing more advanced chips than Intel.
In late 2018 and all of 2019, Intel struggled to increase its production of newer 10nm chips. Those difficulties disrupted production of its 14nm chips, leading to massive CPU shortages for PC makers. At the same time, a resurgent AMD released its new generation Zen CPU, which rectified the poor single-threaded performance of its previous Bulldozer-class CPUs. AMD suffered no shortage as it outsourced its chips, and many PC makers started using their profitable CPUs again.
Between Q4 2016 and 2020, AMD more than doubled its CPU market share from 17.8% to 38.4%, according to PassMark Software, as Intel’s share plummeted from 82.2% to 61 , 6%.
But the pain does not end there. In July, Intel surprised investors by admitting that its new 7nm process had a “roughly twelve-month trend” behind its internal target, meaning those next-generation chips wouldn’t arrive until 2022 and 2023. In By comparison, TSMC is already making 7nm chips. for AMD and other chipmakers, and will likely produce 3nm chips by 2022.
But how bad was the damage?
Intel’s situation looks dire, but the company continues to grow. Its revenues and profits increased 2% and 6%, respectively, last year, as growth in its data center chips offset its supply problems in the PC market.
Image source: Getty Images.
In the first nine months of 2020, Intel’s revenue and profit increased 12% year-over-year. Its data center revenue grew as high use of cloud services during the pandemic boosted demand for its chips, while increased shipments of PCs for remote work and online learning temporarily boosted revenue from computing your customers.
For the full year, analysts expect Intel’s revenue to rise 5% and its earnings to remain flat as the pandemic-induced tailwinds subside. Next year, they expect their revenue and profit to decline 6% and 7%, respectively, as they lag further behind AMD and TSMC.
We should always be skeptical of analyst forecasts, but Intel’s recent mistakes are hard to ignore. Intel CEO Bob Swan, the former CFO who took over after Brian Krzanich’s abrupt resignation in 2018, has focused primarily on reducing the company’s capex, driving its buybacks and shedding its profitable business. of NAND memory chip manufacturing instead of solving your urgent R&D problems.
Those moves suggest that Swan is more interested in financial engineering than chip engineering, and those short-sighted strategies could put Intel further behind AMD. Meanwhile, Swan’s two main R&D works, discrete GPUs and automotive chips, will likely not generate enough revenue to offset its current challenges in the CPU market.
But can we view Intel as an undervalued income stock?
Intel is trading at just 11 times forward earnings and pays a 2.6% forward dividend yield. You spent just 27% of your free cash flow on your dividends over the past 12 months, giving you plenty of room for future increases.
That low valuation and respectable performance should limit Intel’s downside potential, but there are plenty of other cheap dividend stocks to buy in this growth-oriented market. Intel will probably not attract the bulls again until it solves its R&D problems, decides to move to “fabless” like AMD, or hires new leaders to breathe new life into its aging, insular business, so these actions are best avoided. and stick with better-managed chipmakers for now.
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