2020 has been a difficult year for microchip giant Intel (INTC 0.64%). We Intel investors missed out on a 14% gain in market tracker S&P 500, swallowing a loss of 22% instead. At the same time, smaller rival Advanced Micro Devices (AMD -0.35%) saw its share prices double. Is this the beginning of the end for Intel, or can the company and stock bounce back in 2021 and beyond?
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Intel's challenges
Intel and AMD used to have very clear-cut roles to play in the semiconductor market. AMD was the plucky upstart, always nipping at Intel's heels and trying to steal a little bit of market share in one sub-sector or another. Intel held all the trump cards with a unique lead in manufacturing technologies, a matchless brand name, and much deeper pockets.
That relationship turned upside down in the summer of 2020, as Intel confirmed that its 7-nanometer manufacturing process would be delayed by another six months. AMD was already churning out its own 7-nm processors at the time, with the help of third-party chip foundry Taiwan Semiconductor Manufacturing (TSM -0.34%). That announcement set AMD's stock on fire in late July while sending Intel shares sharply downward.
According to technology market analyst Mercury Research, AMD has grabbed the largest market-share slices seen since 2013 in the desktop market and the largest share ever in notebooks. AMD is making the most of this rare opportunity to do battle with Intel with a lead in manufacturing technologies instead of the usual handicap of lagging behind.
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Intel's advantages
Things are changing, but Intel is still winning in many ways.
AMD's multiyear market-share records barely squeaked by the 20% mark, leaving Intel nurturing massive leads of roughly 80% share in both desktop and notebook processors. The contrast is even sharper in server chips, where AMD holds less than 7% of the total market. That's important because server products are more costly and more profitable than their PC-style brethren.
As a result, AMD is a long way away from matching Intel's financial muscle. Intel's revenue added up to $78 billion over the last four quarters while AMD's trailing sales stopped at $8.7 billion. When it comes to trailing net income, Intel leads by $22 billion to $880 million. AMD's free cash flows of $580 million can't hold a candle to Intel's $15 billion. I could expand this discussion to dozens of different metrics, and Intel would walk away with an easy victory every time.
And Intel isn't exactly sitting back and giving AMD every opportunity to extend its uncommon manufacturing process advantage. The company is not too proud to get some help from Taiwan Semiconductor while working through its in-house manufacturing hiccups, and the long-term cadence of predictable process upgrades should get back on schedule in 2021.
Meanwhile, Intel is exploring many new markets that could become significant growth engines over the next decade or so. Here's how Intel CEO Bob Swan described his approach to larger target markets at a recent industry conference:
We've evolved from a PC era to a mobile and cloud area, to an era that we call distributed intelligence. And in that world, our computers are not just the PC, it's not just the server, but it's the network, it's the car, it's the city, it's the home, it's the factory, it's the hospital. So we see a world where just everything looks like a computer, and compute is becoming more and more pervasive in everything that we do.
The company is developing specialized processors for all of these enormous target markets, from self-driving car platforms to smart-home solutions and industrial controllers. Intel's addressable market is only growing larger, even if notebook and desktop sales are stalling.
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Don't call it a comeback; Intel was never gone
The market has overreacted to Intel's manufacturing slip-up. That overreaction goes both ways. Intel looks incredibly cheap at nine times trailing earnings, and AMD seems ripe for a sharp correction as shares are trading at 128 times earnings. Again, I could give you a whole bunch of different valuation metrics, and Intel comes up roses in every comparison.
I fully expect Intel to make a triumphant return to market leadership and rising share prices as the company works out its 7-nanometer manufacturing issues in 2021. The stock is a fantastic buy at today's bargain-bin prices.
By the way, I'm also incredibly impressed by AMD's accomplishments under current CEO Lisa Su, and I might consider buying the stock when its valuation comes down to earth. Intel's rebound next year could very well trigger the AMD correction I'm looking for.
