Intel (INTC +4.57%), the world's top manufacturer of x86 CPUs for PCs and data centers, is often considered a solid tech stock with a stable dividend. But in recent years, Intel struggled with the loss of the growing mobile chip market to Qualcomm, longer PC upgrade cycles, and competition from a resurgent AMD (AMD +2.42%).
Its expansions into new markets -- including driverless cars, IoT (Internet of Things) chips, and memory chips -- also couldn't offset those weaknesses. The escalation of the U.S.-China trade war into a tech war also threatens to cause Intel headaches in China, where it generated 28% of its revenues last year.
Are those challenges dimming Intel's luster as a long-term investment? Or will it overcome these challenges over the next few years?
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Intel's core strengths and weaknesses
Unlike AMD, Qualcomm, and other chipmakers, Intel manufactures its own chips at its own foundry. This can be a blessing and a curse: It eliminates its dependence on contract chipmakers like TSMC, which can be overloaded with orders on newer nodes, but it needs to continually upgrade its foundry and expand its capacity to stay ahead of the tech curve.
Intel previously led the CPU market with alternating two-year "tick-tock" cycles. Each "tick" introduced a smaller microarchitecture and manufacturing process, and each "tock" upgraded the microprocessors at the same nanometer node.
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Intel abandoned that classic upgrade cycle four years ago, due to the rising difficulty of creating smaller microprocessors.
In 2018, a difficult ramp from 14nm chips to 10nm chips resulted in a chip shortage that frustrated PC makers and left Intel vulnerable to AMD's new Ryzen CPUs -- which offered comparable performance at lower prices than Intel's CPUs. Intel faced similar competition in the data center market from AMD's Epyc chips.
Intel still hasn't resolved its chip shortage, but it declared it would boost its production capacity by "another mid-20%" this year. Meanwhile, AMD continues to launch new 7nm chips, while Intel only started selling a full family of 10nm chips in the second half of 2019 -- three years after the node's planned launch date.
Meanwhile, Intel continues to invest aggressively in driverless cars by buying companies like Mobileye and Moovit. These acquisitions won't boost its revenues significantly in the near term, but they could help Intel establish a foothold in connected cars -- and prevent it from losing that next-gen market in the same way it lost the smartphone market.
The bears versus the bulls
The bears believe Intel's execution issues will persist, and CEO Bob Swan -- the former CFO who took over after Brian Krzanich's abrupt resignation two years ago -- lacks the engineering know-how to counter AMD. Swan's failure to resolve Intel's chip shortage and his initial focus on buybacks also indicate that the company will tread water instead of swimming forward.
The bulls believe Intel will eventually resolve its chip shortage and strike back at AMD with more powerful next-gen chips in the PC and data center markets. Intel's recent suspension of its buyback plans also indicates it will defend its dividend and conserve cash for the development of new chips.
Intel also remains a crucial chipmaker in China, since its domestic chipmakers still can't match Intel in the high-end PC and data center markets yet. That technological superiority should shield it from Chinese regulators for now.
The outlook and the valuations
Intel withdrew its full-year guidance in April due to COVID-19, but analysts expect its revenue to rise 3% as its earnings -- throttled by higher investments, sales of lower-margin chips, and its suspension of buybacks -- dip 2%.
Intel's revenue and earnings are expected to rise 1% and 2%, respectively, next year -- but those are still anemic growth rates compared to AMD's analyst estimates for double-digit revenue and earnings growth in both years.
Intel's stock trades at just 14 times forward earnings and pays a forward yield of 2.1% -- which should limit its downside potential. However, the bulls probably won't return to Intel until it overcomes its near-term challenges. Therefore, investors shouldn't rush to buy Intel when other chipmakers -- like AMD -- are riding on stronger tailwinds.
