Intel Corporation (INTC), one of the largest chipmakers in the world, has lagged its peers over the last few years in the development of advanced transistor processors.
Intel’s rival, Advanced Micro Devices, Inc. (AMD), has already introduced 7nm chips to the market and plans to bring 3nm chips by 2022 through its business relationship with Taiwan Semiconductor Manufacturing Company Limited (TSM), which is already using 5nm chips.
Intel is yet to bring 7nm chips to the market, and this delay led Apple, Inc. (AAPL) to ditch Intel as a supplier of processors for MacBook products late last year.
Pat Gelsinger, the newly appointed Intel CEO joined the company on Feb. 15 and introduced a strategic plan on March 23 to expand the manufacturing capabilities of the company to bring advanced chips to the market. This is a step in the right direction.
Details Of The New Plan
Intel is planning to invest $20 billion in 2 new manufacturing facilities in Arizona to expand its foundry services segment. Fabless chipmakers, or semiconductor companies that design and sell hardware and semiconductor chips without manufacturing the silicon wafers used in their products, outsource the fabrication process to a foundry. Intel’s new plants are trying to capture this business opportunity and according to the recent announcement, Intel will treat the foundry business as a standalone unit to avoid cannibalization.
Separately, the company confirmed its plans to outsource some of its manufacturing needs to third-party chipmakers, which could turn out to be a catalyst for growth in the future. AMD has already seen success with this strategy.
Many Wall Street analysts have been questioning Intel’s decision to manufacture all products internally, which has proved to be inefficient in the last few years. Using a blended production strategy might help Intel bring advanced chips to the market more efficiently, which in turn, will boost revenue growth.
The Outlook Is Promising And The Valuation Is Cheap
The growth in the adoption of cloud computing services accelerated as a result of the virus-induced recession that led to secular growth in the work from home movement. This presents Intel with a good opportunity to grow its earnings.
Data centers are under pressure to improve the efficiency of their servers to cater to the strong demand for cloud computing, and this can only be achieved by using advanced chips. Intel, as one of the leading chipmakers in the world, is well-positioned to benefit from this macroeconomic development.
Intel’s strong presence in the personal computer chip market will also be a catalyst for growth. According to data from Gartner Research, worldwide PC shipments clocked in at 275 million units in 2020, growing 4.8% year-on-year. This was the highest annual growth rate seen since 2010, and the increased adoption of remote working played an important role in the growth of PC sales last year.
Many large-scale employers including Twitter, Inc. (TWTR), Snap Inc. (SNAP), and Alphabet Inc. (GOOG) have introduced plans to allow remote working in the long run, which is likely to keep PC sales at an elevated level in the next couple of years. This is good news for Intel.
Despite all these positive developments, Intel continues to trade at a forward earnings multiple of 14.28 compared to the sector average of 31.62. This suggests that Intel is relatively undervalued, and the failure of the company to introduce technologically advanced processors in the last few years is the probable cause of cheap valuation metrics. However, a positive turn-around is possible if the company is able to execute its new plan effectively.
Wall Street’s Take
Analysts reacted to the latest announcement by Intel with mixed feelings. According to Barron’s, Bank of America analyst Vivek Arya has cast doubt over Intel’s ability to match or exceed the manufacturing capabilities of industry leaders such as Samsung and Taiwan Semiconductor.
Barclays analyst Blayne Curtis is wary of the lack of clarity regarding the upcoming products that would be released by Intel, and he remains cautious of the significant capital outlays the company will have to incur to develop the announced manufacturing plants in Arizona.
Wall Street analysts have an average analyst price target of $66.34 per share for Intel based on 14 Buy, 11 Hold and 8 Sell recommendations. This implies modest upside potential of around 4% from the current market price. (See Intel stock analysis on TipRanks)
Takeaway
Intel’s new CEO is focused on improving the efficiency of the manufacturing process. Lack of efficiency has kept the company from capturing market share in the lucrative semiconductor industry over the last few years. If executed correctly, the newly announced plan could trigger a growth phase, which should lead to an expansion in valuation multiples. Shares seem relatively undervalued, but the investment thesis for Intel is dependent on the success of this new plan.
Disclosure: Dilantha De Silva did not have any positions in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
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