Intel (NASDAQ:INTC) shares fell off a cliff last week after management announced production and shipment delays for the company’s next-gen 7-nanometer chip. These delays mean the biggest headwind for INTC stock will persist. And its competition will keep leveraging superior products to steal market share.
Needless to say, Wall Street didn’t like the news.
Although the delay was announced next to strong second-quarter results and a hiked full-year guide, investors didn’t care. INTC stock dropped from above $60 to below $50.
I say buy the dip. Intel will be just fine long term, and INTC stock is now too cheap to ignore.
Here’s a deeper look.
Concerns Are Justified
The concerns about Intel are not misplaced. Intel was once the unstoppable Goliath in the global CPU market. That dominance was threatened over the past few years. Smaller competitors like Advanced Micro Devices (NASDAQ:AMD) came to market more quickly with next-gen products, like 7-nanometer CPUs.
Intel was supposed to launch its own 7-nanometer chip in 2021, and the era of Intel losing market share to smaller competitors was expected to close.
But Intel just pushed back a 7-nanometer product launch to late 2022. Thus, Intel projects to keep losing market share until late 2022, at least.
Perhaps more worrisome, as analysts pointed out on the second-quarter conference call, many competitors are expected to be producing 3-nanometer chips by late 2022. To that end, there is a going concern here that Intel may be permanently behind the innovation curve.
Of course, that’s a big concern. And it is certainly a reason why INTC stock should trade lower on news of 7-nanometer product delays.
Intel’s Market Share Dominates
Although the concerns about Intel are not misplaced, they are overstated.
It’s important to understand the extent of Intel’s dominance in this market. Intel projects to do $75 billion in sales this year. Global semiconductor sales are expected to be around $426 billion. Intel therefore has 17.6% share of the global semiconductor market.
AMD, by comparison, has just 2% market share.
This huge market share gap gives Intel plenty of wiggle room to be behind the curve for a few years. The global semiconductor market projects to keep growing at a healthy pace for the next several years on huge demand drivers like cloud computing, 5G and AI. Even if Intel gradually loses share in that growth market for a few years, the company will still sustain largely positive revenue growth.
Further, demand for Intel’s core line of 10-nanometer chips remains robust. Data-centric revenues rose 34% year-over-year last quarter. Total revenues are expected to rise 4% this year.
And, perhaps most importantly, Intel management remains committed to delivering an annual cadence of significant product improvements. The company has the resources (total cash investments north of $25 billion) and track record (Intel has been king of CPUs for 20+ years) to support this commitment.
Big picture: a 7-nanometer product delay is bad news, not a deal-breaker. Long term, Intel – and INTC stock – will be just fine.
INTC Stock Is Undervalued
Relative to the company’s long-term growth prospects, INTC stock is significantly undervalued.
Intel will lose market share into 2022. But such share erosion will be gradual, given Intel’s dominant incumbent positioning. Plus, the global semiconductor market will sustain 4%+ sales growth over the next few years.
During that stretch, Intel should sustain 1% to 2% revenue growth.
Meanwhile, post-2022 and 7-nanometer product launch, Intel should regain lost market share in 2023, 2024 and 2025. In those three years, Intel could grow sales by 4%+.
Concurrently, gross margins will be under pressure into 2022 thanks to more lower-margin 10-nanometer sales. Post-2022, though, a bigger mix of higher-margin 7-nanometer sales will boost gross margins. Also, Intel is exercising disciplined cost control, so any revenue growth in excess of 2% over the next five years will generate positive operating leverage.
Net net, Intel reasonably projects as a low-to-mid single-digit revenue grower into 2025, with upside margin drivers post-2022.
On those assumptions, my modeling suggests that $6.50 in earnings per share is doable for Intel by 2025. Based on a historically-average 13-times forward earnings multiple and an 8.5% annual discount rate, that equates to a 2020 price target for INTC stock of over $60.
Bottom Line on INTC Stock
Intel’s 7-nanometer chip delay is bad news. But it’s not a not deal-breaker. Long term, Intel will be just fine.
INTC stock price does not reflect this reality today. Instead, it reflects over-pessimistic assumptions about Intel’s long-term growth trajectory.
The market will realize this over the next few quarters as Intel sustains healthy growth despite the product delay. As the market does realize this, INTC stock could rebound back to $60 by the end of the year.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not own a position in any of the aforementioned securities.