For the past several months, chipmaker Advanced Micro Devices (NASDAQ:AMD) has taken complete control of the semiconductor narrative. Specifically, the story floating around markets was that AMD was rapidly stealing market share from Intel (NASDAQ:INTC) due to Intel’s 10nm chip production delays. As a consequence of that narrative, AMD stock has been red hot and INTC stock has been ice cold.
Hold on. The story’s changed.
The semiconductor narrative has turned completely upside down over the past week. Rather than AMD taking share, the narrative is now that Intel’s 10nm production ramp is happening more quickly than expected, meaning that the company is set to take share back from AMD. The shift in the story has turned AMD stock ice cold and made Intel stock red hot.
How will the narrative look going forward?
Intel punching back and accelerating 10nm volume production will be the story for the foreseeable future. Meaning, we are still in the early stages of a big Intel turnaround, a shift that should propel INTC stock meaningfully higher, and I wouldn’t be surprised to see $60 within the next few months.
Investment takeaway? Buy Intel stock, ditch AMD stock.
Intel’s Turnaround Is Just Starting
The backstory in the Intel-AMD rivalry is pretty straightforward.
Follow along: In the first scene, Intel dominates AMD. Cut to the next scene where AMD gets a leg-up in engineering architecture and starts to steal market share away from Intel. Next, in Scene 3, INTC punches back and ends the era of AMD market share expansion. Scene 4 opens with Intel heading back to domination over AMD.
This four-part narrative has repeated itself multiple times over the past two decades, and appears to be repeating itself today. Scene 1 happened in 2016-17. Scene 2 took place over the course of 2018 to-date, with AMD launching next-gen chips while Intel struggled with volume production.
We are now somewhere between Scenes 2 and 3, anticipating Intel punching back. The company recent supply update revealed that 10nm yields are improving and volume production is expected in 2019. Analysts at BlueFin Research corroborated this, saying that 10nm production ramp could happen before June 2019. Thus, Part 3 — POW! — will likely materialize in early to mid 2019. Holy Nanochip, Batman!
Historically speaking, Scenes 3 and 4 of this narrative can be characterized as the Intel turnaround. So, we are in the early stages of a multi-month Intel turnaround, wherein the company will boost 10nm production and reclaim stolen market share from AMD. During that stretch, Intel stock should perform quite well.
INTC Stock Has a Lot of Room to Run Higher
In the event that Intel does ramp up 10nm production in 2019 and steals back market share, INTC stock has a lot of room to run higher.
This is a company with broad exposure to multiple secular growth industries, like data-centers, AI, IoT, automation, and AR/VR. Yet, despite the company’s exposure to those big growth markets, Intel stock trades at just 11X forward earnings and has a 2.4% dividend yield.
Those are deep-value multiples. The average forward earnings multiple in the S&P 500 index is 17X. The dividend yield is 1.8%. Intel stock is trading at a 35% discount to market average valuation, while featuring a dividend yield that is 60 basis points above market average.
That doesn’t make much sense when you consider Intel’s secular growth drivers. As such, once investor sentiment improves, you could see Intel stock fly higher rather quickly. How much higher? Don’t be surprised to see INTC stock re-test its upper $50’s highs, and potentially even break through to $60. To get there by the end of the year, Intel stock only needs a 13-14X forward earnings multiple, which is historically average for this stock.
Intel is in the early stages of a big turnaround, and that means it is time to buy Intel stock before it roars towards $60.
As of this writing, Luke Lango was long INTC.
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