Over the last few years, Intel (INTC -0.38%) stock has long struggled to gain traction. The semiconductor company's loss of its technical leads as well as management turmoil have soured many investors on the company. However, amid lackluster revenue growth and uncertainty regarding the role of its fabs, two factors have emerged that could make Intel stock an eventual winner.
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1. Leadership change
Leadership has become an ongoing problem for Intel. The sudden resignation of former CEO Brian Krzanich over a relationship with an employee brought in Bob Swan to the helm in 2018. However, Swan's expertise lay in finance instead of engineering, leaving Intel with no strategy to regain its technical edge.
Still, even with the company's bleak situation, Intel could forge a comeback -- thanks in part to the Feb. 15 arrival of Pat Gelsinger as CEO. Gelsinger has amassed more than four decades in the tech industry as both an engineer and a manager. He spent 30 of those years at Intel and most recently served as the CEO of VMWare. Gelsinger helped to design Intel's original 80486 processor before serving as the company's first chief technology officer, all of which might give him an advantage in knowing what Intel needs to again become competitive.
However, Gelsinger faces an uphill battle. Intel once dominated rival chipmaker AMD (AMD 2.44%) but has since lost its technical lead. It must now also play catch-up to NVIDIA (NVDA 3.65%), which has become a competitor in recent years. In the past, Intel achieved and reinforced this dominance through the "tick-tock" cycle. It improved its overall chip-building process in "tick" years while crafting upgrades to the chips themselves during "tock" years. However, when Intel lengthened that cycle beyond two years, improving chips more slowly than its competitors, its harder-working rivals gained a technical lead.
Nonetheless, investors should not rule out an Intel revival. In recent years, AMD CEO Lisa Su has taken her company to the cutting edge after many industry observers left it for dead. This shows that such a comeback is far from impossible, especially since Intel remains a sizable presence in its industry.
Still, investors will have to exercise patience. According to an interview with CNN Business, Su told AMD's clients in the early days of its recovery that she would not have anything for them to look at for three years. Since chip designs typically occur in three-to-five-year cycles, investors should likely expect the same for any Intel recovery.
Gelsinger will also have to bolster confidence in the company's financials. Although it still posts almost eight times as much revenue as AMD, Intel financial performance has continued to suffer. The pandemic allowed revenue to rise 8% in fiscal 2020, as employees' shift toward working from home fueled a temporary increase in demand for computers and chips. Nonetheless, Intel's Q4 2020 revenue fell 1%, slightly lower than the 2% annual revenue growth during fiscal 2019.
Additionally, Intel's P/E ratio stands at about 13. Such a low multiple may appear inexpensive, but the higher valuation the market has awarded the company's peers -- 45 for AMD, and 41 for Taiwan Semiconductor (TSM 2.84%) -- suggest that investors lack confidence in Intel.
2. National security
Despite this stagnation, Gelsinger could foster another advantage for Intel due to one overlooked factor -- national security. Intel operates eight of the 20 semiconductor fabrication plants, also called fabs, in the U.S., according to the Congressional Research Service.
Nonetheless, according to the Semiconductor Industry Association, the U.S. share of chip production has fallen to less than 13%, well short of the 47% of global demand claimed by the U.S.
Additionally, under former CEO Swan, Intel showed an inclination to follow its competitors by contracting out to outside fabs based primarily in foreign countries. Fabs such as those operated by Taiwan Semiconductor -- TSMC for short -- and Samsung manufacture chips for companies like AMD and NVIDIA. Moreover, Intel allocated $14.3 billion in capital expenditures in 2020, down from the $16.2 billion spent in 2019 -- spending less on company facilities as it outsourced more of its operations.
However, Gelsinger wants to take Intel in a different direction. On the Q4 2020 earnings call, he expressed an interest in reviving Intel's foundries, which served as the basis for its successes in past decades. This could help allay one key concern about the U.S. chip industry. TSMC and Samsung primarily operate foundries in or close to China, making their fabs potential targets should relations between the U.S. and China deteriorate.
To this end, the entire semiconductor industry has called on the Biden administration to provide subsidies for U.S. manufacturing research. The federal government has not yet approved such an outlay. Still, should the chip industry receive such a subsidy, Intel's size suggests that it would become one of the larger beneficiaries, which would give the company the funding it needs to catch up to its peers.
Where this leaves Intel stock
Currently, Intel trades at a low P/E ratio driven by lackluster revenue growth. Nonetheless, Intel now has an engineer with a management background at the helm. Though investors will not know for years whether Gelsinger's vision will bring about a recovery, Intel has hired someone who could potentially restore its competitive edge.
Moreover, Intel's main competitors' previous advantage -- the ability to manufacture chips at lower costs, in more modern facilities located primarily in Asia -- could become a vulnerability. If Intel can capitalize on subsidies to improve its foundries in the U.S., this tech stock could become a winner for patient investors.
