Intel (INTC) has always been one of the largest players in the semiconductor segment and holds a large share of the PC and server processor markets as well. However, despite having such a grip over the market, the company had to go through a rough phase, especially in the last seven quarters.
Issues like the shortage of chips around the world or the company’s inability to break into the smartphone segment have taken a huge toll on the stock’s performance. In the last year, it has lost almost 27% of its value and about 12% year-to-date, underperforming the S&P 500. We think the stock is a Hold at this moment, given its overall valuation and financial outlook.
Intel Corporation is an American-based multinational corporation and technology company that has been an undisputed leader in the integrated designing and manufacturing of microprocessors used in PCs and servers. The company boasts having the most powerful and energy-efficient silicon solution to any product that is smart and connected.
Intel had ruled in the personal computer era by closely partnering with Microsoft. However, the sudden spurt in the growth of mobile phones has diminished its old charm. The company has been losing its market to rivals like Advanced Micro Devices (AMD), as its biggest customers like Apple (AAPL) and Microsoft (MSFT) are slowly resorting to their self-designed chips.
Last year, even in the Semiconductor segment, Samsung overtook its position to become the world’s #1 semiconductor vendor by revenue, capturing 13% of the market while Intel’s share remained at 12.5%, as the company had experienced the slowest growth among the top 25 vendors.
Overall, even though the company’s short-term outlook doesn’t look that promising these days, it is designing newer strategies to address those challenges.
Christopher Danely, a Wall Street Analyst from Citigroup, maintained a Hold rating on the stock recently. However, he has lowered the price target on Intel to $55 from $58 because of the company’s very poor guidance for the current year despite reporting strong fourth-quarter results.
Intel Exceeded Revenue Estimates
It can’t be denied that Intel is not as nimble as its competitors in current times. The company’s recent fourth-quarter report has also received mixed responses. Intel reported a growth of only 3% in its revenues for the said quarter, translating to earnings per share of $1.09, even while the semiconductor market is booming.
Still, it was not all bad for the company. While its revenue of $19.5 billion for the quarter was low, it was higher than the company’s prior guidance by $1.2 billion. This increment in its revenues was driven by the 20% year-over-year growth in its Data Center segment. For the next quarter, however, Intel is expecting its revenue to be only $18.3 billion.
Intel also suffers from weakening profitability. Its gross margin had dropped to 55.4% in the fourth quarter of 2021 compared to 60% during the same period in 2020. The company expects its gross margin to decrease further over the next two years because of the increased capital expenditures it intends to make.
On a brighter note, as the pandemic effect fades away, Intel might benefit from the rising demand for desktop computers.
Wall Street’s Take
Turning to Wall Street, only seven out of 27 analysts have given Intel a Buy rating, whereas another 14 of them have suggested a Hold on its shares. However, six analysts have suggested a Sell. The average Intel price target is $54.55, implying 19.8% upside potential on the stock.
Battling Multiple Problems
Intel has been battling through multiple issues that are leading to its lagged performance. One of the biggest contributors for such a situation is the ongoing shortage of chips. This shortage is casting a heavy impact on both the company’s top and bottom lines. To tackle this situation, Intel has been changing the way it manufactures its chips.
The company intends to source some components from TSMC to speed up its chip development process and will be incurring more than $20 billion to set up two leading-edge chip factories near Columbus, Ohio.
Moreover, it aims to build the foundry project to compete with TSMC in making chips for other companies. However, as the project is a highly complex one, its success is still uncertain at this point in time.
The intense competition in the market is also a point of concern for Intel’s long-term performance. The company had a significant hold over the chip market, but these days, it has been continuously losing its grip to AMD. Such a thing might have occurred because, unlike AMD, Intel does almost everything in-house, including the design and manufacturing of its products.
Further, this market loss is also taking over its CPU Server and Cloud Server Processor segments. The company’s share in the CPU market has come down to 65% from 82% over the past five years, which is quite alarming.
Intel’s current outlook is pretty weak, followed by the continuous loss in market shares. Nonetheless, the company plans to regain the industry leadership, at least in the chip segment, by 2025 and has already laid out a clear roadmap for its chip technology for the next four years.
Also, execution of these plans won’t be too difficult for Intel as it is already loaded with cash resources. Moreover, the 5% increase in its dividend payments not only makes it a wonderful dividend stock but also reflects its confidence in its capability of regaining its past glory. So, at this moment, although Intel may not be a buy, we think it is worth holding.
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