With Tailwinds Picking Up, It’s Time to Get Excited About Intel Stock Again

Luke Lango

Updated Mon, Oct 1, 2018, 7:29 AM

Over the past several months, the narrative in the semiconductor market has been dominated by the idea that Advanced Micro Devices (NASDAQ:AMD) is positioned to steal significant server share from market leader Intel (NASDAQ:INTC) due to next-gen 10nm chip production delays at Intel. As a consequence of this narrative, AMD stock has soared from $15 in June to over $30 today. Meanwhile, Intel stock has dropped from $57 to $45 during that same stretch.

But, this narrative appears to be gradually changing. As a result, it is time to get to excited about INTC stock again.

Specifically, Intel just provided a supply update which importantly included news that 10nm yields are improving and volume production is expected in 2019. In other words, although 10nm production at Intel has been delayed, it is no longer being delayed, and it looks like things are only going to get better from here.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

10 Triple-A Stocks to Buy for the Rest of 2018

That means it is time to buy Intel. This stock has been beaten up on concerns related to 10nm production hiccups and delays. But, those hiccups and delays appear to be in the rear-view mirror.

The next chapter in the 10nm narrative will be volume production in 2019. Because the next chapter in this narrative is a positive catalyst, Intel stock should bounce back from current levels, especially considering the dirt cheap valuation (11X forward earnings).

All together, now is the time to get bullish on Intel.

Intel’s Headwinds Are Behind It

The long-term growth narrative surrounding Intel has been, still is, and projects to remain largely positive. The amount of data in the world is only exploding higher thanks to increased digital engagement, the mainstream emergence of the Internet-of-Things (IoT), the widespread adoption of Big Data analytics, and the birth of AI-enhanced technologies, among other things.

The need to process, store, analyze and share all this new data is also growing. As result, demand for Intel’s data-centric suite of products is exploding higher. Intel’s data-centric businesses is up 25% in the first half of 2018. This growth should remain robust for the foreseeable future given the aforementioned secular tailwinds. As such, INTC projects to be a long-term winner.

But, Intel stock has struggled recently because of near-to-medium term concerns that Intel was falling behind AMD. Specifically, AMD’s next-gen 10nm chips are essentially ready to go. Intel’s next-gen 10nm chips aren’t.

In fact, Intel has struggled on the 10nm side for a while, and volume production has been consistently delayed. The market started to worry about when Intel would get its act together with 10nm production. As a result, the market sold INTC stock and bought AMD stock.

But, 10nm production headwinds appears to be behind the company. Intel’s recent supply update implies that 10nm production is now going as planned, with yields improving and volume production expected for 2019.

Thus, the era of 10nm production delays appears to be in the rear-view mirror. The market will likewise shift its focus from “concerned about when 10nm volume production will arrive” to “excited about 10nm volume production in 2019”.

This shift will inevitably provide a lift to Intel stock.

Intel Stock Is Ready to Bounce

INTC has been killed on concerns related to 10nm production delays. Not only did the stock drop from $57 to $45, but the forward earnings multiple fell from ~14X for ~11X. That is a steep 20%-plus cut in valuation.

This 20% cut isn’t warranted. At 11X forward earnings, Intel stock is materially undervalued assuming 10nm volume production does arrive in 2019.

In that scenario, Intel shouldn’t cede that much server market share to AMD. Intel’s data-centric growth rates should remain robust, and overall profit growth should remain healthy, too. Consequently, assuming 10nm volume production in 2019, Intel is a double-digit earnings grower trading at 11X forward earnings.

That is far too cheap, especially considering the secular tailwinds supporting Intel stock. This cheapness is due to weak sentiment. But, sentiment should start to improve now that 10nm production appears to be moving in the right direction.

Improving sentiment will result in significant multiple expansion from a depressed base, and that coupled with earnings growth could create a double tailwind for INTC stock.

Bottom Line on INTC Stock

The long-term bull thesis on Intel stock has always been strong. But, the near-to-medium term outlook is now improving thanks to a positive supply and production update. As a result, INTC stock looks poised to reverse course and head higher over the next several months.

As of this writing, Luke Lango was long INTC.