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$Intel Corp(INTC.US)$ stock will come good. Just not right away.
The former chip industry leader is now cheap as chips. This after reporting net income of $5.1 billion, $1.24 per share on revenue of $19.6 billion for the June quarter.
The numbers beat estimates, but investors turned thumbs-down anyway, sending INTC stock down 2.5% overnight.
INTC stock was due to open July 23 at about $54.50, a market cap of $225 billion. The dividend, not threatened by the earnings, now yields nearly 2.5% and the price to earnings ratio is 12.5. The stock sells for barely three times last year’s sales.
By contrast $NVIDIA Corp(NVDA.US)$, which designs chips but doesn’t own a foundry, is at $196/share after a 4:1 stock split. That’s a market cap of $488 billion, a PE of 92, and the dividend yields .08%. The price to sales ratio is nearly 25.
What Went Wrong With INTC Stock
Intel didn’t get into trouble fast, and it’s not getting out of it fast either.
CEO Pat Geisinger didn’t rejoin the company until February, after nearly a decade running $VMware Inc(VMW.US)$. Before that he had been with Intel for 30 years.
The man he was pushed out for, Brian Krzanich, turned out to be one of the worst CEOs of the last decade. That’s a rogues gallery that includes Virginia Rometty of $International Business Machines Corp(IBM.US)$, Jeff Immelt of $General Electric Co(GE.US)$ and Randall Stephenson of $AT&T Inc(T.US)$.
Krzanich ran off competing voices and failed to compete in manufacturing, losing the lead to $Taiwan Semiconductor Manufacturing Co Ltd(TSM.US)$. He was finally pushed out after a sex scandal.
Intel’s problems can be summed up in one word: ultraviolet. Taiwan Semiconductor has mastered Extreme Ultraviolet Lithography. It has a road map to make chips with circuit lines 2 nm apart later this decade. That’s thinner than the distance between strands of DNA. Intel is stuck at 10 nm.
Rather than cede the field to the Taiwanese, whose foundries supply Nvidia, $Advanced Micro Devices Inc(AMD.US)$ and $Apple Inc(AAPL.US)$, among others, Geisinger is doubling down. He’s putting $20 billion into two new Arizona chip plants. He’s also negotiating the purchase of Global Foundries, the Arab-backed chip foundry, at a price of about $30 billion.
It’s affordable, but it’s not cheap. Intel had $14.3 billion of operating cash flow in the first half of the year. The company also sent $5.2 billion during the first half to shareholders, in the form of dividends and stock buybacks. The cash flow, and payouts, were both lower than in 2020.
The current chip shortage sees Nvidia holding the pricing power Intel once had. It is continuing to gain share in data centers, even though clouds were designed to use cheaper chips.
What bears fear is that Intel could lose even its current pricing power if the chip shortage ends quickly. $Texas Instruments Inc(TXN.US)$, another chip maker, has said revenues should flatten later this year. Intel’s forecast is that shortages continue, into 2023.
The Bottom Line
I was a huge critic of Krzanich. I wasn’t a fan of his successor, financial man Robert Swan. I didn’t start recommending Intel again until Geisinger was being recruited.
Shares rose sharply after Geisinger was hired, to as high as $68 in April, but the honeymoon is over. INTC stock trades today at around $53.
You don’t have to rush back into Intel, but it’s a good hedge against Nvidia gains. These have been spectacular. It’s up 343% in just the last two years.
There are no losers because everything is a computer now. I call it the Machine Internet and it’s one of the new decade’s big trends. You don’t need to rush back into Intel but three years from now the current price will look dirt cheap.
On the date of publication, Dana Blankenhorn held long positions in INTC, NVDA, TSM and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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