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You Should Buy Intel Stock Before It Mounts Its Comeback

Will Healy

The struggles continue for Intel (NASDAQ:INTC). Just as investors thought the company finally turned the corner, disappointing earnings reports have dashed both the hopes for and the price of Intel stock.

You Should Buy Intel Stock Before It Mounts Its Comeback

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Intel has seen its share of setbacks recently. AMD (NASDAQ:AMD), the company once regarded as “little brother” during the PC era, has taken a huge technological lead over Intel.

The company also found itself unable to catch up with Qualcomm (NASDAQ:QCOM) in the 5G smartphone modem market. Intel stock attained a low valuation. However, the company has much to prove in its struggle to regain a leadership position in the chip market.

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Intel’s Playing Catch-Up

The recovery that has blessed PC-era stocks such as Microsoft (NASDAQ:MSFT) and Nvidia (NASDAQ:NVDA) has somehow left Intel behind.

As these companies found success in new niches, Intel continued to struggle with where to go next. Management missteps and scandals over the last few years only contributed to the lack of growth.

The company had tried to compete with Qualcomm in the smartphone modem market. During the second quarter, they waved the white flag and sold that business to Apple (NASDAQ:AAPL).

Also, Intel’s management had hoped data center chips could become the company’s next great revenue driver. Intel has not lost this battle yet, but it has faced a strong competitive challenge from AMD. Rumors abound that Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) has begun to make Google-specific server boards with chips from AMD and not Intel.

This represents a severe setback to Intel. This happened because AMD took a massive lead over Intel in this key area. AMD continues to increase CapEx on its 7nm chip at a time when Intel struggles to ramp up production on its 10nm chip.

Intel Still Could Recover

Intel saw a massive decline following the first-quarter earnings report. A subsequent recovery fell back following the second-quarter release. Consequently, Intel only trades about 10% above its 52-week low.

However, despite these setbacks, investors should not count Intel out . As our own James Brumley mentioned, AMD’s 7nm Ryzen chips have not always reached the advertised operating speeds. Hence, AMD’s lead in this area may turn out to be much less than advertised.

Moreover, InvestorPlace contributor Chris Lau also points out that Intel has an enormous opportunity in 5G.  Once users begin to adopt 5G,  “network cloudification” could again bring servers powered by Intel chips to the forefront.

The Bottom Line on Intel Stock

Intel appears well-positioned for buyers. Now, the INTC stock price currently stands at around $47 per share. This takes the forward price-to-earnings (PE) ratio to just 10.6.

Admittedly, the fact that profits will shrink by an estimated 4.1% this year and only grow by 1.4% in 2020 does not inspire investors. And with INTC falling back after looking like it will sustain a recovery, investors may feel gun shy.

However, the current valuation represents a low for INTC by historical standards. The PE ratio averaged 15.6 over the last five years. Also, INTC stock often saw a PE ratio well above 30 during the PC era.

If the current performance of MSFT stock is an indication, a return to prominence could bring Intel the same level of multiple expansion. Furthermore, Intel stock has repeatedly bounced back whenever it fell below the $45 per share level. Hence, I see little downside at current prices.

Also, indications point to a sustained recovery, eventually. Analysts forecast an average profit growth rate of 7.33% per year over the next five years.

Also, the dividend of $1.26 per share yields almost 2.7%. It also has risen every year for the last four years and has never seen a cut. All of this leaves investors with little to lose by buying at these levels.

Profiting from Intel stock may require some patience. However, it could again attain some level of market leadership once 5G becomes more widely adopted. If nothing else, investors can do worse than collecting a 2.7% dividend yield while they wait for this recovery.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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