Technology remains one of the brighter spots as fears of a broader slowdown unnerve investors. But how to pick winners remains a challenge, especially since the market and the stocks are simply not what they were a few years back.
As far as semiconductor stocks go, Intel (INTC - Free Report) is a bellwether. In the past, while semiconductor growth was largely determined by computers, the company was the largest supplier of the microprocessors driving them.
For the future, it has broadened its scope to cover memory, logic, storage and networking to target emerging markets like cloud, artificial intelligence, 5G, IoT and self-driving cars. Intel has also increased its investment in China, which can improve its standing with Chinese regulators and help it take a bite of that growth even as the government doubles down on its own semiconductor industry.
The U.S. semiconductor industry has also changed substantially since the last economic downturn.
First, Moore’s Law has become a thing of the past, meaning that companies are no longer able to lower cost every 18 months (or even 2 years) by shrinking transistors. The difficulties of shrinking beyond 10nm seem to have taken the market by surprise. Taiwan Semiconductor TSM is the only one on its way to ship 7nm for Advanced Micro Devices (AMD - Free Report) after Globalfoundries bowed out, leaving AMD and International Business Machines (IBM - Free Report) in the lurch.
Intel, which has its own fabs, is having the greatest difficulty getting its 10nm chips out the door, losing its process lead to TSM. Samsung is the other major foundry that can jump onto the scene, but it won’t ship anything soon, and certainly not this year.
Second, although the semiconductor market has been cyclical historically, chances are, the cyclical change won’t be as dramatic this time. For one, there are multiple markets gobbling up semiconductors (auto and soon autonomous driving, consumer, IoT, AR/VR, factory automation, the list goes on), which in combination should generate some growth. Also, technology challenges are raising cost for producers that will have to be passed on to buyers, contributing to higher prices.
There are separate challenges for the memory market at this time. After a stellar two years of tighter supply and robust prices, things are likely to change this year because of pressures on both the demand and supply sides.
On the demand side, there is a limit to the amount of price increase the market can absorb given depressed PC sales and declining smartphone demand as offset by expansion in the cloud. On the supply side, memory makers have been expanding capacity and Chinese companies are rushing onto the scene with three new fabs (this won’t impact the market until next year).
What’s Going for Intel
Intel is the most trusted brand with clout at system integrators and other customers. Moreover, it is the company offering the most powerful chips for the commercial and gaming focused PCs, the two growth areas within PCs. So it is likely to remain dominant at PCs, which remains a big market.
The data center segment has benefited from companies moving to the cloud and Intel is solidly positioned here with strong offerings driving compelling performance per watt.
Intel remains dominant at the world's top 500 supercomputers with a 95.2% share and will harness its 48-core Xeon Cascade Lake CPU, Optane memory and storage, connectivity hardware like the Omni-Path Architecture and software to offer a compelling solution that will be very hard to beat, no matter where the competition is coming from. AMD’s 7nm EPYC line, IBM Power solutions and NVIDIA (NVDA - Free Report) will make inroads, but it’s very unlikely that Intel will be substantially impacted.
Earlier, the company tried to make a mark in the mobile space but missed the opportunity completely.
It has however jumped into the middle of the action with self-driving cars, IoT and 5G. Alphabet (GOOGL - Free Report) is the farthest along its self-driving roadmap and the company’s technology has Intel inside.
On the 5G front, Intel remains behind market leader Qualcomm (QCOM - Free Report) , which will ship modems supporting the standard in the first half of 2019. But Intel is close on its heels with volume shipments of its XMM8160 discrete chipset supporting both standalone (SA) and non-standalone (NSA) 5G modes along with thelegacy fallback modes 4G, 3G and 2G in the second half.
There is a concern that integrated 5G solutions from rivals will hit the market much sooner than Intel (likely next year), helping them pick up market share and Intel will likely tell us more about its roadmap this year. Meanwhile, Intel technology will help it gain share at Apple (AAPL - Free Report) , which is still a good deal because Apple and Android are the two main segments being targeted anyway. Other OEMs testing Intel technology include KT, Nokia (NOK - Free Report) , Ericsson and Tencent. Intel is also working with AT&T (T - Free Report) in automotive.
Intel has invested in China, which along with its 5G advancements can help with growth despite strained Sino-U.S. relations.
What’s Going Against Intel
Intel has squandered its process lead, allowing competitors like Advanced Micro Devices (AMD - Free Report) to get in on its market share, or at least that’s what most analysts and the media seem to be saying. But there’s also the theory that Intel had to redesign its 10nm chips x-ing out SAQP or Self Aligning Quad Patterning, which has been named the culprit for the low yields on the process.
The 10nm Cannon Lake it will be shipping this year, (which is by the way comparable with the 7nm densities coming out of peers), therefore may have a different design from the one showcased. It will put Intel on par with the rest which is somewhat better than falling behind. What’s more, its 7nm won’t be delayed, putting Intel in the de facto lead all over again (when it ships).
Considering Intel’s stature and the length of time it has led the market, the company shouldn’t have had such a hard time finding a CEO, especially since elevation has been the traditional way Intel has done it. But Krzanich seems to have gone to lengths to alienate or fire all the folks that may have fit the bill.
There’s too much going on at the company now what with the new markets it is targeting and the issues it has been having at 10nm to be without proper leadership. The CEO position has been empty too long; hopefully there will be an update/announcement during the earnings call on Jan 24.
Over the past year, the stock has returned more (11.7%) than the semiconductor market (-9.6%) to which it belongs, as well as the S&P 500 (-6.8%).
At the same time, its forward 12 months P/E of 10.73X remains below its 5-year median value of 13.22X. The story is similar for the entire group (electronic – semiconductors market), which is currently trading at 11.32X, below its 14.11X median value.
This is at a time when the S&P 500 trading at 15.71X, below its 5-year median value of 17.31X.
So while Intel is trading at a premium to other semiconductor companies, it remains at a discount to the S&P 500.
Intel’s size and stature makes it less comparable with all semiconductor companies, so let’s take a quick look at three of the names that matter.
Intel is at a discount to Qualcomm, which is currently trading at a forward 12 months P/E of 15.30X.
It is also at a discount to NVIDIA’s 23.37X.
It is also at a discount to AMD’s 37.74X.
Recent developments indicate that Intel may not remain the unquestioned market leader because of significant competition from a number of players on multiple fronts and in its most profitable and emerging businesses. While Intel is very much in the game, it may cede some market share as the market itself continues to expand.
This may not have been avoidable anyway, but likely explains its discount to the peers that can challenge it. The company really needs a CEO at this point to steer it in the right direction. If that happens sooner rather than later and if its 10nm process isn’t so delayed that Apple is driven into Mediatek’s arms, there’s a good chance that Intel will be worth buying this year.
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