Intel (NASDAQ: INTC) What was once considered a stable take stock produced reliable returns. Its position as the world’s largest manufacturer of x86 CPUs for PCs and data centers has given it a wide moat, and its strong cash flow growth has comfortably funded its large buybacks and dividends.
However, Intel’s stock declined nearly 15% this year as the Philadelphia Semiconductor Index rose 50%. Let’s see why Intel weakened the broader industry, and see if it could be better next year.
How Intel lost its mojo
For decades, Intel led the CPU market by following “Moore’s Law”, a prediction set by a co-founder Gordon Moore to double the number of transistors in the same region of silicon every two years . It was the foundation of a two-year “tic-tuck” cycle that drove Intel’s business for half a century.
At each “tick” launch, Intel shrunk one chip to a smaller size. In each “talk” update, the chip was upgraded but the size remained the same. However, Intel found it difficult to manufacture small chips in its own foundry, and Moore’s Laws faded away in recent years.
Intel’s foundry fell behind as soon as Moore’s Law ended. TSMC (NYSE: TSM)The world’s largest contract chipmaker, in a “process race” to make smaller and more power-efficient chips. As a result, “fabless” chipmakers who 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 until late 2019, Intel struggled to increase its production of new 10nm chips. Those difficulties hampered the production of its 14nm chips, leading to a huge CPU shortage for PC manufacturers. At the same time, a resurgent AMD launched its new generation of Zen CPUs, which improved the poor single-threaded performance of its previous bulldozer-class CPUs. AMD suffered no shortages, as it outsourced its chips, and many PC manufacturers began to use its cost-efficient CPU again.
According to PassMark Software, between the fourth quarter of 2016 and 2020, AMD doubled its share of the CPU market from 17.8% to 38.4%, as Intel’s share fell from 82.2% to 61.6%.
But the pain does not end there. In July, Intel shocked investors by accepting its new 7nm process, “almost twelve months trending” behind its internal goal – which meant that next-gen chips would not arrive until 2022 and 2023. By comparison, TSMC is already manufacturing 7nm chips. For AMD and other chipmakers, and it will likely produce 3nm chips by 2022.
But how bad was the loss?
Intel’s situation looks grim, but the company is still growing. Its revenue and income increased by 2% and 6%, respectively, last year to compensate for the supply issues of its revenue center.
In the first nine months of 2020, Intel’s revenue and earnings both grew 12% year-over-year. Its data center revenue has increased as demand for its chips increased for improved use of cloud services during the epidemic, while increased PC shipments for remote work and online learning temporarily boosted its client computing revenue is.
For the full year, analysts expect Intel’s revenue to grow by 5%, and for its earnings to remain flat as an epidemic-driven tailwinds Wayne. Next year, they expect its earnings and earnings to fall by 6% and 7%, respectively, as it falls ahead of AMD and TSMC.
We should always doubt analysts’ forecasts, but Intel’s recent missteps are hard to ignore. Intel CEO Bob Swan, a former CFO who took the helm following the sudden resignation of Brian Krinich in 2018, primarily focused on reducing the company’s capex, boosting its buybacks, and resolving its pressing R&D issues Rather have focused on dividing their profitable Nanda Smriti business.
Those moves suggest Hans is more interested in financial engineering than chip engineering – and Intel may fall behind AMD due to those myopic strategies. Meanwhile, Hans’ two major R&D plays – discrete GPUs and automotive chips – probably won’t generate enough revenue to offset their ongoing challenges in the CPU market.
But can we consider Intel as an undisclosed income stock?
Intel trades at only 11 times forward earnings and pays a forward dividend yield of 2.6%. It spent just 27% of its cash flow on its dividend in the last 12 months, which gives it plenty of room for future growth.
This low valuation and respectable yield should limit Intel’s downside potential, but there are plenty of other cheap dividend stocks to buy in this growth-oriented market. Intel probably won’t attract bulls again until it solves its R&D problems, decides to go “fabless” like AMD, or employ new leaders to breathe in its aging, insular business. Keeps on – so it is better to avoid this stock and stick with better run chipmakers for now.