The tech-heavy Nasdaq 100 and the chip-sector's Philadelphia Semiconductor index have delivered market-crushing returns over the last year, but industry giant Intel (INTC 1.74%) was left far behind. Chipzilla is barely breaking even since the start of 2020 and is the worst-performing large-cap chip stock over the last 52 weeks. Most of its peers doubled over the same period and several large chip stocks more than tripled.
Does Intel belong in Silicon Valley's bargain bin, or is it time to pick up some shares at a generous discount? Let's find out.
What's wrong with Intel?
The main reason behind Intel's disappointing performance in recent months is that the company's manufacturing process upgrades aren't going well.
Historically speaking, Intel's in-house manufacturing lines have generally been ahead of rivals and third-party chip manufacturers. That advantage has allowed the company to deliver next-generation products ahead of chief rivals Advanced Micro Devices (AMD -1.81%), NVIDIA (NVDA -2.48%), Qualcomm (QCOM -0.85%), and Samsung. More advanced chip-making processes can result in more powerful processors and significant cost savings.
Intel's last two manufacturing upgrades have been difficult and delayed, giving the aforementioned rivals an opportunity to flip the script and fight from a stronger position in recent months. Critics see AMD stealing Intel's lunch in the data center, while Nvidia and Qualcomm make inroads in other Chipzilla strongholds such as high-speed networking solutions and automotive computing.
A new development
Intel may have turned the tide in its favor this week. The sea change won't come right away, but the chip giant most certainly sowed the seeds of something new.
Sure, anybody can call 2021 "a transitional year" and promise better days ahead, as Intel CEO Pat Gelsinger did on Tuesday. Raising the company's financial guidance for this fiscal year is also an easy move. Adjusted earnings can be fudged, and talk is cheap.
Intel is putting its money where Gelsinger's mouth is, though. The company is not only enjoying stronger demand than expected for its data center and PC processors, but also sinking a cool $20 billion into building more manufacturing facilities in the Arizona desert. Gelsinger and his management team are so confident in Intel's return to the top of the manufacturing technology race that the new facilities will be partly used in a foundry capacity. In other words, Intel will sell its presumably top-notch chip-making services to other companies.
Image source: Getty Images.
Money talks
Sure, $20 billion isn't peanuts, but Intel can afford a beefy infrastructure investment. The company generated $21 billion of free cash flow in 2020 and ended the year with $18 billion in cash equivalents. This is the right time to throw additional resources into powering up Intel's technology infrastructure, even if it takes a massive capital investment to get it done.
Market makers are largely waiting for evidence that Intel can make this work, leaving its shares priced at just 12.6 times trailing earnings and 16 times free cash flows. I expect Intel to make the most of its $20 billion capital investment in Arizona-based chip factories.
When all is said and done, we'll remember today's Intel prices as a fantastic buying window. I think you should take advantage of these deeply discounted stock prices.
