Semiconductor giant Intel (INTC -6.41%) is having a rough time in 2020. The stock closed Wednesday's trading at $45.06 per share, having slid 25% lower this year. Share prices are back where they were three years ago.
Is Intel in real trouble today, or should investors snap up some shares at historically low prices? Let's have a look.
What's wrong with Intel?
Intel has suffered a handful of big setbacks recently.
The company ran into manufacturing issues that ceded its traditional lead in semiconductor process technology to third-party chipmaking specialists such as Taiwan Semiconductor (TSM -0.16%). The problems ran deep enough that Intel is increasing its reliance on Taiwan Semi's manufacturing services. This unique situation gives Intel rivals like Advanced Micro Devices (AMD 0.32%) an opportunity to compete on a level playing field, where Intel doesn't hold the trump card of superior manufacturing processes.
Last week, longtime customer Apple (AAPL 1.37%) unveiled a new line of Mac computers using Apple's own chips instead of Intel CPUs. Apple is a large and important customer, and the potential damage from losing this crucial account might go beyond the lost sales to Apple itself. Other PC makers and server system builders may choose to explore alternative CPU ideas now that Apple has led the way in that direction.
Rebuttals to the bearish talking points
Intel's management argues that the increased reliance on Taiwan Semi isn't a bad thing. The difficult manufacturing-process upgrade had forced the company to rethink its high-level processor designs, allowing for different parts of the processor package to be made under different manufacturing methods and even by different chipmakers.
"Now we have more flexibility in whether we make or buy, or whether we make for others," CEO Bob Swan said in the third-quarter earnings call. "Many of our future products can no longer be described as manufactured inside or outside or as being a large-core or a small-core product. These products will take advantage of hybrid architectural approaches and the universe of IP deployed both inside and outside the walls of Intel."
I understand that it's Swan's job to put a positive spin on difficult facts, but I also see value in a more-flexible processor design model. This approach should let Intel pick and choose the best manufacturing option for each part of its processors. The upcoming Alder Lake and Sapphire Rapids processor lineups will tap into this adaptable design method, paired with the new SuperFin graphics processing platform. This way, Intel should be able to reclaim some lost market share from AMD in the PC and server markets while the kinks in Intel's next-generation manufacturing are getting fixed.
As for the lack of Apple orders, the danger of losing this account appears to be overstated. Apple has not been seen among Intel's three largest customers in the last decade. The company has not accounted for more than 10% of Intel's annual sales at any point in this 10-year span. I would worry if Dell Technologies or Hewlett Packard Enterprise selected a different supplier of PC and server processors, since these two companies accounted for 30% of Intel's sales in 2019. That's not what's happening here, and I'd be surprised to see HP and Dell following Apple's example. We're comparing pomegranates to oranges.
So, is Intel a buy today?
Intel's stock has been treading water for three years, but the underlying business never stopped growing. Annual sales have increased by 24% while free cash flows nearly doubled:
Stalled share prices plus growing profits equal attractive buy-in prices. The stock is priced for absolute disaster at just 8.8 times trailing earnings and 2.3 times trailing sales. That makes sense only if you believe the business is going belly-up. I think that's a big mistake and that Intel will climb out of this deep trough over the next couple of years.
In other words, Intel looks like a fantastic buy right now.