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Has Intel Stock Found a Catalyst?

Chris Markoch

About a week ago, things were looking much simpler for Intel (NASDAQ:INTC) stock bulls. On Oct. 11, the U.S. and China announced a partial deal in the ongoing trade war. This was welcome news for semiconductor stocks such as INTC that have been trading in a range.

Intel stock benefits from the 5G push, but watch out for technical grumblings.
Intel stock benefits from the 5G push, but watch out for technical grumblings.

Source: dennizn / Shutterstock.com

However, it quickly became apparent that the trade deal wasn’t really a deal at all. It was more of a truce. Both sides made concessions. But there was no agreement on the issues that would make a difference for semiconductor stocks.

This means current or prospective investors in INTC stock are back to trading on other news surrounding the stock. Fortunately for Intel, it has recently made a significant investment that may help change the current narrative.

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Making a Big Bet on 5G

On Oct. 15, Intel announced an agreement to purchase a software business, Smart Edge, from Pivot Technology Solutions for $27 million.

Smart Edge is software that focuses on “edge computing.” Edge computing splits data and stores it closer to users, making computing devices respond faster. The software runs on Intel chips. This is allowing Intel to carve out a niche in the 5G space. This will be a critical opportunity to expand its revenue stream beyond its two large business segments of personal computers and data centers.

“We plan to take full advantage of our combined technologies and teams to accelerate the development of the edge computing market,” Dan Rodriguez, a general manager of the network computer division in Intel’s data center group, said in a statement.

Why Did Intel Stock Drop?

Intel stock was trading around $60 per share until it released first-quarter earnings. The company gave downward revenue guidance of $69 billion, which was $2 billion lower than analysts’ estimates. Perhaps more concerning to investors is that if that revenue number held it would mark a decline a 2.5% decline in year-over-year revenue. In 2018, Intel posted revenue of $70.8 billion.

But the stock lost nearly 25% of its value. Was this a disproportionate response? Perhaps. But what has to be concerning for investors is that INTC stock has attempted and failed to breach a crucial level of resistance at around $53 two separate times.

The general consensus is that Intel stock is paying too steep of a price. However, there’s a difference between what a stock should be doing and what it actually is doing. The problem for INTC stock has been a steady stream of news that is giving investors pause.

Hampered By Production Delays

Unlike most semiconductor companies, Intel manufactures its own chips. This has been a strategic advantage for the company. But at the moment, it is proving to be an obstacle. The company has struggled in its transition from 14-nanometer chips to 10-nanometer chips. When Advanced Micro Devices (NASDAQ:AMD) introduced 7-nanometer chips, original equipment manufacturers became frustrated with Intel’s chip shortage and started giving business to AMD. This has been one of many negative drags on the stock.

AMD outsources its CPU production to dedicated foundries. One of those is TSMC (NYSE:TSM), which is now ahead of Intel in the manufacturing process. While Intel says it will resolve its 14-nanometer shortage during 2019, DigiTimes recently reported that the shortage may last until next year.

INTC Stock Looks Undervalued at the Moment

Intel is trading at price-earnings ratio of below 12 (11.88 as of this writing). That is significantly less than rivals Microsoft (NASDAQ:MSFT), AMD and Qualcomm (NASDAQ:QCOM). Those companies have PE ratios of 29.58, 93.66 and 21.20, respectively. But it’s also significantly below its historical trading level of 15-times earnings or higher.

If INTC stock were valued at 15 times earnings right now, it would have a stock price of approximately $64.50 per share. But it’s not trading at that multiple. And analysts predict that INTC will post a decline in non-GAAP earnings for both Q3 and Q4 earnings on a YOY basis. This makes a case that INTC stock could be going down before it goes up.

As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.

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