Chipmakers Intel (NASDAQ:INTC) and AMD (NASDAQ:AMD) have been stuck in a decades-long competition in which Intel has played the part of Goliath and AMD has played the part of David. That is why Intel presently has a market cap of $220 billion-plus, while AMD has a market cap of under $20 billion.
But, the consensus belief among industry insiders, analysts and investors is that David is about to land a big hit against Goliath. Specifically, AMD is launching new chips, while Intel’s new chips aren’t coming until the back half of next year. As such, everyone believes that AMD is going to steal a whole bunch of market share from Intel where it matters most — the data center and cloud computing markets. That is why bullish AMD stock and bearish INTC stock has been the prevailing sentiment in markets.
Indeed, AMD stock is up 90% year-to-date. INTC stock up just 6% year-to-date.
If history has anything to say about this it’s that this happens all the time, and the result is always the same. Namely, every few years, investors get bullish on AMD stock and believe that David is finally going to unseat Goliath. But Goliath always punches back and squashes David. Historically speaking, these events always end in AMD stock collapsing and INTC stock rebounding.
Will history repeat itself this time around?
I think so. Intel will bounce back in 2019 with a knock-out punch through new chips that will likely short-circuit this huge run in AMD stock. Meanwhile, that knock-out punch will likely spark a healthy rebound in INTC stock.
Here’s a deeper look.
History Repeats Itself in the AMD-Intel Battle
Over the past several months, AMD stock has been red hot, INTC has been weak, and everyone is pricing in huge market share gains for AMD and huge market share losses for Intel.
This is nothing new. The AMD-Intel battle is several decades old. During that stretch, there have been multiple times when AMD stock has been red hot, INTC stock has been cool, and everyone believed that AMD was going to finally unseat Intel.
But, it never happens. Instead, Intel punches back. INTC stock rises. AMD stock drops.
For example, in 2005, AMD was stealing market share from Intel. Namely, AMD was making technological advances in the server market, which was the high-growth market of the time, and the investor and analyst community feared that AMD’s big gains in a big growth market meant the end of Intel’s dominance. In 2005, AMD stock went from about$ 20 to about $40. INTC stock, meanwhile, dropped from $25 to $20.
The narrative changed course sharply in 2006. Intel punched back, cutting prices and launching new chips. AMD couldn’t compete. By the end of 2006, AMD stock was at $15. INTC stock, meanwhile, was heading back towards $25.
The same thing happened in 1996-97. For most of the 1990s, AMD struggled to compete with Intel. But, AMD came roaring back in 1997 with new chips that made Intel’s chips “completely obsolete,” according to one chip market enthusiast. Consequently, AMD stock roared from $6 in mid-1996 to $20 by mid-1997.
By mid-1998, AMD stock was back down around $6 because Intel punched back, and ended the short-lived era of AMD market share gains.
In other words, the past several decades are full of examples of when investors thought AMD was going to take the throne from Intel. But, it never happens. Instead, Intel punches back, AMD stock drops, and INTC stock rebounds.
Intel Stock Is Presently Undervalued
History will repeat itself this time around with INTC stock.
Intel is delaying production of its 10 nanometer chips because its preceding product line-up, 14 nanometer chips, are just that good. Maybe AMD steals market share in the near-term as a result of the production delay. But, just like in 2006, AMD will launch a slew of new 10 nanometer products next year, and those products will serve as a knock-out punch to AMD.
INTC stock could rise quite a bit in response to that knock-out punch.
I maintain an outlook that growth rates will moderate over the next several years due to law of large numbers, tougher laps, cooled off data center growth and bigger competition. But, revenue growth should remain healthy in the range of about 5% per year over the next five years.
That is enough growth to drive slight spending leverage, and should push the operating margin up by a few percentage points over the next several years.
Assuming mid single-digit revenue growth and slight margin expansion, I think Intel can do about $5.30 in earnings per share in five years. A historically-average 13X forward multiple on that implies a four-year forward price target of nearly $69. Discounted back by 10% per year, that equates to a 2019-end price target on INTC stock of $57.
Therefore, I reasonably see 20%-plus upside over the next 12-18 months.
Bottom Line on INTC Stock
Everyone thinks that AMD is going to unseat Intel over the next several years as the dominant player in this market.
This thinking isn’t new. In fact, it has popped up every few years over the past several decades. Every time, this thinking is short-circuited by a knock-out punch from Intel. AMD stock drops. INTC stock rises.
This time around is no different. As such, I think a new flood of Intel products in 2019 could short-circuit the big rally in AMD stock, while concurrently lifting INTC stock 20% higher.
As of this writing, Luke Lango was long INTC.
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