Intel (NASDAQ:INTC) stock is going to make people a lot of money once the market stops falling.
Since Feb. 19, shares have dropped from $67 to their March 12 price of below $50. This has taken the price-to-earnings ratio below 12, and the dividend yield to almost 2.5%. The company had free cash flow of almost $17 billion last year so it’s selling at just 13 times that.
It’s hard to think of bargains when you can’t look at your portfolio, but if there’s some cash or equivalents there it’s time to count it. When the Dow Jones stops dropping, the rebound is going to be swift. There is an enormous amount of money on the sidelines, and there was even before the coronavirus from China.
Some of that will go into Intel.
Made Some Mistakes
Intel remains a flawed company that didn’t get the full benefit of the tech sector’s run-up. Under CEO Robert Swan it is being run out of the finance department. Its fabrication plants are now considered second-rate compared with those of Taiwan Semiconductor (NYSE:TSM). Even management admits that its 10 nanometer production will be less profitable than what it produced at 22 nm, because of competition. Hedge funds were dumping it even before the virus hit.
Despite this, Intel stock has gotten the full brunt of the downturn, with shares down by about one-quarter. The company known as “Chipzilla,” co-creator of the integrated circuit with Texas Instruments (NYSE:TXN), is no longer considered best of breed.
Intel’s old chips are highly insecure. The latest bug, called LVI, was found by teams of university researchers and will require a complete redesign to fix. It impacts five years of production.
Intel is finding it hard to crack the memory market, after breaking with Micron Technology (NASDAQ:MU) a few years ago. Intel may have to work closely with Micron to meet its own needs.
After telling people to work from home and banning travel to China, Intel then found an employee tested positive for the coronavirus after visiting its Arizona plant.
Green Shoots
Why, then, am I telling you to fit this dog into your portfolio?
First, you don’t need to have the best chips to sell into the cloud. You need the most chips, and the cheapest chips. Intel isn’t going to lose its data center business.
Second, Intel is about to take this bargain approach into other niches. It has announced a full range of networking silicon for 5G mobile networks. It thinks it can grow that part of the business from $5 billion per year to $25 billion in three years. Through Barefoot Networks, acquired for $7 billion last year, Intel is demonstrating switches that run data at 12.8 Terabytes/second. This will expand its reach in the data center market.
Intel may be second-rate, but it does rate. It expects to have 7 nm chips in production next year, and still hopes to lead when the industry gets to 5 nm a few years later.
The Bottom Line on Intel Stock
Intel doesn’t have to be the innovation leader to make money in chips. In the cloud era it’s how many competitive chips you make that determines how much money you make.
Intel is one of only four companies making microprocessors. The others are Samsung Electronics (OTCMKTS:SSNLF), Taiwan Semiconductor and privately held Global Foundries. The capital constraints of Moore’s Second Law, in which manufacturing costs rise with chip complexity, guarantee it a place in the future.
Given that reality, and its financial strength, Intel’s comeback after the virus is guaranteed.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.