Intel Stock Analysis - Undervalued Now? Can New CEO Turn it Around?
Hello everyone, this is Victor here. Welcome to the Intelligent Investor Channel where you will learn about stock investing and personal finance that will help you become a great investor. In my previous video about Intel, I talked about “Why Intel is at least 1 to 2 years behind AMD in desktop CPUs, and why Intel needs to outsource its CPU production to TSMC.” In this video, I’m going to talk about “Is Intel stock undervalued? And can new CEO Pat Gelsinger turn around Intel?” I will cover these topics in this video. Intel’s stock performance vs AMD and Nvidia Intel’s current valuation vs AMD and Nvidia Intel and AMD market share comparison Why Intel is behind AMD? How will Pat Gelsinger turn around Intel? Intel’s long-term prospects Intel’s major competition and risks My prediction of Intel stock, and what I will be doing going forward Make sure you watch until the end of the video to find out whether I am buying Intel stock. If you like this video, smash the like button, subscribe, and turn on the notification button.
I will continue to make many great videos about stock investing and personal finance that will help you become a great investor. Let’s start. As you may already know, Intel stock underperformed by a large margin compared with AMD and Nvidia in the past 5 years. It all started in October 2014 when Dr. Lisa Su became the CEO of AMD. She turned around AMD from near bankruptcy. Now, AMD is much more competitive than Intel in the desktop CPU market.
Here is a stock performance comparison between Intel, AMD, and Nvidia. In the past 5 years, Intel stock increased +89.31% compared with AMD’s +4,431.19% and Nvidia’s 1,849.74%.
In the past 2 years, Intel stock increased +20.45% compared with AMD’s +317.37% and Nvidia’s +246.36%. In the past 1 year, Intel decreased by -10.52% while AMD increased +77.01% and Nvidia increased +119.37%.
In the past 3 months, Intel increased +17.55% mainly because Intel announced to replace its CEO while AMD increased +11.68% and Nvidia increased +2.04%. Now, let’s look at Intel’s current valuation compared with AMD and Nvidia to see if Intel stock is undervalued. All these data came from Yahoo Finance as of Jan 22, 2021. First, the PEG ratio tells you “the price-to-earnings you are paying compared with the stock’s estimated earnings-per-share growth over the next 5 years.”
Generally speaking, the lower the PEG ratio is, the more undervalued the stock is. According to Yahoo Finance, Intel’s PEG ratio is 2.58 compared with AMD’s 1.84 and Nvidia’s 2.50. Intel’s PEG ratio is higher than AMD’s because Intel’s future earnings-per-share growth over the next 5 years is expected to be low. Second, you can see Intel’s most recent quarterly revenue decreased -1.10% year-over-year. In comparison, AMD’s most recent quarter’s revenue grew +55.50% year-over-year and Nvidia’s
revenue grew +56.80% year-over-year. Third, Intel’s trailing P/E ratio and forwarding P/E ratio are much lower than AMD and Nvidia’s. Forth, Intel’s net income at $20.9 billion is much higher than AMD’s and Nvidia’s. This means Intel is still much more profitable than AMD and Nvidia. Fifth, Intel’s dividend yield of 2.33% is much higher than Nvidia’s 0.12% dividend
yield. AMD doesn’t pay dividend yet. All these data show that Intel is a very profitable company, but Intel does not have the same high revenue growth rate (+50% year-over-year revenue growth rate) as AMD and Nvidia. This is why Intel’s P/E ratio at 11.47 is much lower than AMD’s P/E ratio of 125.73 and Nvidia’s 89.67.
Here is the important point I want to make—Intel stock is currently undervalued if the new CEO Pat Gelsinger can turn around Intel within the next 3 years. Otherwise, if Intel’s new CEO cannot turn around Intel within the next 3 years, Intel stock will likely be “a value trap” because Intel’s revenue and earnings growth will either remain low or even decline because of increasing competition from AMD and Nvidia as well as other companies that are using ARM architecture to make their chips. If you are a computer gamer like me, you will know that Intel no longer makes the best-performing CPUs for desktops. Here is the latest article from TomsHardware that shows the best gaming CPUs, you can see all the best gaming processors or high-performance CPUs are all AMD Ryzen processors. Intel used to dominate in high-performance CPUs in both single-core and multi-core performances.
Here is an article from Techrader: “AMD Overtakes Intel in desktop CPU market share of the first time in 15 years.” According to PassMarkSoftware that tracks AMD vs Intel market share, as of Jan 24, 2021, Intel still has the largest 60% overall CPU market share compared with AMD’s 40%, but Intel’s CPU market share has been declining since Q1 2019. In terms of desktop market share, AMD has a market share of 51% while Intel has 49%. In terms of laptop market share, Intel still has the largest 81% market share while AMD has 19%.
In terms of server market share, Intel still has a monopoly with a market share of 98.6% while AMD has 1.4%. The key takeaway is that Intel is still very competitive in the laptop and server markets, but Intel is losing quickly in the desktop CPU market. In the recent CES 2021 event, AMD announced its new Ryzen 5000 series mobile processors which are based on the company’s 7nm Zen 3 architecture. I believe this will take away Intel’s 81% laptop CPU market share further similar to AMD taking away Intel’s desktop CPU market share.
If you’re thinking about investing in Intel because the stock appears undervalued or because Intel has a high dividend yield, you will want to know why Intel is behind AMD and Nvidia. Here are the main reasons. First, Intel has delayed its 10nm and 7nm processors for many years mainly because Intel’s in-house manufacturing processes cannot produce enough yields for its next-generation processors while the largest semiconductor company in the world—TSMC—is already mass-producing 10nm, 7nm, 5nm, and soon 3nm processors. This is from Intel’s Q2 2020 earnings call that explains Intel’s manufacturing problems. Intel CEO said: “We are seeing an approximate six-month shift in our seven-nanometer-based CPU product timing relative to prior expectations. The primary driver is the yield of our seven-nanometer process, which, based on recent data, is now trending approximately 12 months behind our internal target.
We have identified a defect mode in our seven-nanometer process that resulted in yield degradation. We've root caused the issue, and believe there are no fundamental roadblocks.” Then, in the latest Q4 2020 earnings call, Intel CEO explained that Intel has fixed the manufacturing defect for its 7nm processors that are set to release in 2023. He said “In July, we highlighted a challenge with our 7-nanometer technology and started a process to improve it while evaluating the best approach for our 2023 product lineup. Since that time, we have made tremendous progress on our 7-nanometer technology.
When 7-nanometer was originally defined, the flow contained a particular sequence of steps that contributed to the defect issue we discussed in July. By re-architecting these steps, we’ve been able to resolve the defects. As part of this work over the last six months, we also streamlined and simplified our 7-nanometer process architecture to better ensure we’ll be able to deliver on our 2023 product road map. The inline data we have been collecting and our pipeline of proven yield development projects gives us confidence in our ability to deliver on our commitments going forward.”
Second, Intel is releasing its 10nm processors in the 2nd half of 2021 and delaying its next-gen 7nm processors to 2023 (assuming Intel will not delay again). In comparison, AMD already released its latest 7nm Ryzen 5000—series desktop processors in late 2020 and will likely release its 5nm Ryzen processors by 2022. This is why AMD is at least 1 to 2 years ahead of Intel. Third, AMD is much more flexible than Intel because AMD outsources to TSMC to produce its CPUs. As of now, according to TSMC’s latest Q4 2020 earnings, TSMC is already mass-producing 5nm processors in addition to making 7nm processors for its customers. According to TSMC’s Q4 2020 earnings call, TSMC is on track of mass-producing 3nm processors in the second half of 2022—which is far ahead of Intel’s manufacturing processes.
Intel’s biggest problem is its manufacturing technology and processes not producing enough yields and not being able to compete with TSMC’s manufacturing processes even though Intel is one of TSMC’s largest customers. TSMC is already producing 5nm products for Apple, Qualcomm, and other major customers. Assuming Intel will not delay its 7nm processors in 2023, I believe Intel will still be 1 to 2 years behind AMD’s 5nm or even 3nm processors that will likely be produced by TSMC. Now, how will Intel’s new CEO Pat Gelsinger turn around the company? He said this in the latest Q4 2020 earnings call: “I know you’re all very anxious to hear more from me on our long-term plans and I’ll be sharing my detailed perspective after I assume my new role in mid-February. That said, I do want to provide my views specifically on 7-nanometer progress. I’ve had the opportunity to personally examine progress on Intel’s 7-nanometer technology over the last week.
Based on initial reviews, I am pleased with the progress made on the health and recovery of the 7-nanometer program. I am confident that the majority of our 2023 products will be manufactured internally. At the same time, given the breadth of our portfolio, it’s likely that we will expand our use of external foundries for certain technologies and products. We will provide more details on this and our 2023 road map once I fully assess the analysis that has been done and the best path forward.” Then he said, “We are holding off on providing guidance for the full year until I join, but we will do so in a timely fashion no later than on our next earnings call in April.” Intel’s new CEO is still choosing Intel’s integrated-device-manufacturer IDM model—which is designing and manufacturing most of its products in-house instead of outsourcing production to TSMC or Samsung Foundry—the two largest semiconductor companies in the world.
Dr. Lisa Su was able to turn around AMD within 5 years, because of the new Zen architecture she introduced in 2017 and because AMD has the flexibility to outsource its production to TSMC that is far ahead of Intel’s in-house manufacturing. I believe it will be very hard for Pat Gelsinger to turn around Intel within the next 3 years because he still wants Intel to produce its most important products in-house instead of outsourcing them. To be fair, Intel is still a very profitable company compared with AMD and Nvidia even though Intel’s revenues have declined in recent quarters.
If you look at Intel’s latest Q4 2020 earnings release, you can see all its businesses—including data center group (DCG), internet of things group (IOTG), non-volatile memory solutions group (NSG), and Programmable Solutions Group (PSG)’s—revenues were down year-over-year. Only its Mobileye and PC-centric Group (CCG)’s revenues increased year-over-year—these two business segments have the biggest growth opportunities for Intel now. In the upcoming Q1 2021 quarter, Intel management expects that the company’s total revenue will be down 12% year-over-year, and its earnings-per-share will be down 24% year-over-year.
This indicates that Intel really needs to produce much better processors going forward and not have more delays. If Intel can somehow pull off making much better high-end desktop CPUs compared with AMD’s Ryzen processors and if Intel can greatly improve its 7nm yields, I believe Intel will have a chance to compete with AMD in the desktop CPU market. Otherwise, Intel will have no choice but to outsource CPU production to TSMC or Samsung Foundry. Here are Intel’s three major risks we need to consider. First, if Intel continues to delay its 10nm and 7nm processors because its in-house manufacturing processes cannot produce enough yields, Intel will be further behind AMD in the CPU market.
This is the biggest reason Intel stock underperformed by a large margin compared with AMD in the past 5 years. Second, Apple released its 5nm M1 Macs that are much more powerful and power-efficient than Intel-based Macs. The M1 chip is based on ARM architecture instead of Intel’s X86 architecture.
The M1 chip is a huge disruption to Intel’s X86 CPU market, because it has the best CPU performance per watt, and it is more powerful than most (if not all) Intel mobile chips in the market. According to The Verge article, Intel’s new CEO Pat Gelsinger said to his employees: “We have to deliver better products to the PC ecosystem than any possible thing that a lifestyle company in Cupertino makes, we have to be that good, in the future.” Gelsinger was referring to Apple’s M1 chip. He understands how much better the M1 chip is compared with most mobile Intel chips in the market. Also, Microsoft announced that it is designing its chips, based on ARM architecture, for its servers and Surface PCs, shifting away from Intel chips. This is another huge blow to Intel.
Third, in the desktop CPU market, AMD is at least 1 to 2 years ahead of Intel. In the discrete GPU market, Nvidia and AMD are far ahead of Intel. Intel is planning to release its discrete GPU to compete with Nvidia’s Ampere GPUs and AMD’s Big Navi GPUs.
I have been a computer gamer for many years. The discrete GPU market is a duopoly between Nvidia and AMD. It will be very hard for Intel to make a discrete GPU for personal computers that is far better than Nvidia and AMD’s. Most computer gamers either choose Nvidia or AMD when they buy their GPUs. Here is my prediction of Intel stock and what I will be doing going forward.
When it comes to investing, it is very important to look forward instead of looking at the past. In the past, Intel was a market leader and a monopoly in the CPU market for more than 15 years. Looking forward, Intel is no longer the market leader in the desktop CPU market. After watching the CES 2021 announcements by Intel and AMD, I believe AMD will likely take away Intel’s 81% laptop CPU market share further because AMD will be releasing its high-performance AMD Ryzen 5000 series mobile processors based on the Zen 3 architecture.
I do not own Intel stock, and I do not have any positions in Intel. I have shares and long positions in TSMC, AMD, and Nvidia, because I like their long-term growth prospects much more. I believe Intel stock will still underperform AMD, Nvidia and TSMC in the next 3 years even if Pat Gelsinger can turn around Intel. If the new CEO can turn around Intel within the next 3 years, Intel is undervalued now.
But if Intel continues to delay its next-gen 7nm processors that are set to release in 2023, then Intel is a value trap, because further delay in 7nm processors will cause Intel to lose more market shares. This may not be a popular opinion, but we need to focus on Intel’s future growth instead of looking at its past dominance in the CPU market. If you like this video, smash the like button, subscribe, and turn on the notification button. I will continue to make many great videos about stock investing and personal finance that will help you become a great investor. This is Victor from the Intelligent Investor Channel.
Thank you for watching. I will see you in my next video.