Best Bundle in the Market, Baby!
Just over a year ago, on January 30, 2023, I penned The Case Against Intel (NASDAQ: INTC) for Pro Trader Today.
As a person who writes about stocks and the stock market, I usually write about stocks that I like, that I think have upside and can make you some loot.
But every once in a while, maybe I’m in a bad mood and because I know it’s not OK to go out and yell at children or kick a dog, I’ll just take some potshots at a stock I don’t like – a stock that I think will lose money for you. And for several years, Intel (NASDAQ: INTC) has been a stock.
For me, Intel became a target back in 2019 at $56 a share, when it sold its 5G mobile modem business to Apple. Yeah, probably no future for mobile computing…eyeroll emoji.
So in my hit piece last year, I said that Intel was a value trap because it was about to see a sizable drop in earnings (value trap meaning that a stock may look cheap but actually isn’t because earnings are headed lower).
I wrote:
I find it helpful to think about P/E ratios in terms of a buyout price. As in, if you were going to get a loan to buy a company, how long would it take you to pay off the loan from the company’s earnings? A company with a Price-to-Earnings ratio of 10 means that it would take 10 years to pay off the loan out of earnings.
Intel currently has a P/E ratio of 9 – if you got a loan to buy Intel, you could pay off the loan out of Intel’s earnings in 9 years…
But sometimes stocks are cheap for a reason. And this is the case with Intel. Earnings are falling, and the forward P/E based on analysts earnings estimates for the next year is 18. So the 9 years to pay off the loan is really more like 18. And if business gets worse for Intel (and in the stock market, bad stories tend to get worse), it might take 20 years or more to pay off that loan.
Intel is a classic value trap.
Could Intel make a turnaround? Maybe start taking some of that data-center market share back from AMD? Maybe increase its share of laptop processors? Sure, anything’s possible…
Times Change
The funny thing is that a lot has changed from last year. Intel is turning it around, and quickly. You should pay attention…
I featured Intel in my Predictions 2024:
All Time Highs for Intel – I’ve been busting on Intel for its glaring missteps for a few years. But I can admit when it’s time to change my mind. Intel has always made (fabricated, to use the correct semiconductor jargon) the chips it designs. But now it is following the Taiwan Semiconductor (NYSE: TSM) model and becoming a contract fab for other semiconductor companies.
Intel earnings will double over the next 12 months, and so will the stock price.
Because Nvidia’s primary supplier, Taiwan Semiconductor, doesn’t have enough capacity to make all of the high end H100 AI chips that Nvidia can sell,Nvidia is bringing Intel into the fold.
Today’s semiconductor fabrication is still similar to what it was when Intel started back in the 1970s. You make a big silicon wafer, etch a bunch of circuits on it, embed some transistors and then you cut the wafer up into individual chips. Only now, you can etch circuits that are 3 nanometers wide, transistors are so small you can put billions of them on one chip, and the ultimate performance of a GPU like Nvidia’s H100 processor comes down how you package it all together to make the league’s best bundle (baby).
It’s called “advanced packaging” and Intel can actually do it. And because Taiwan Semi is maxed out on its packaging capacity, Intel is taking over as much as 10% of Nvidia’s advanced packaging needs. That’s what you call a foot in the door. And maybe with a little sweet talk, Intel can get some more business from Nvidia, or maybe AMD takes notice of Intel’s packaging capability…
But that’s not all…
Going Dutch
The main reason for Intel’s fall from grace came a decade or so ago, when Intel declined to buy next generation lithography machines from ASML (NASDAQ: AMSL). Lithography is the process by which circuits are etched on silicon wafers. The smaller the circuit, the more you can put on a chip to make them smaller, faster and energy efficient.
Taiwan Semiconductor (NYSE: TSM) jumped on the newest generation of ASML lithography machines, got ahead of the current chip cycle, and left Intel in its dust. The two companies diverged in 2020 – Taiwan Semi’s market cap has tripled to $670 billion. Intel’s market cap has fallen ~25%…
It appears that Intel learned something. I understand that Intel is first in line to buy ASML’s newest lithography machines. This gives Intel the opportunity to get a head start on the next chip cycle and actually become competitive with Taiwan Semi.
Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT) eclipsed their Y2K internet bubble highs years ago. Intel came close back in 2020, right before its mistakes became evident.
A year ago, Intel’s earnings were about to get cut in half. But now, earnings for fiscal 2025 (which starts in June) are expected to jump 65%.
Intel’s turnaround is compelling. A run at those all-time highs up around $73 could be coming this year.
Ok that’s it for me today, take care and I’ll talk to you Friday…
Briton Ryle
Chief Investment Strategist
Pro Trader Today
brit.ryle@protradertoday.com
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