Intel (INTC -2.40%) could seem like the last stock tech investors might want since its semiconductor development efforts have fallen behind that of its current archrival, Taiwan Semiconductor Manufacturing (TSM -3.45%). But new leadership in the form of engineer Pat Gelsinger taking on the CEO role has set a process in motion for Intel that should help it catch up to its peers.
Since chip development cycles take from three to five years, prospects for a near-term comeback appear uncertain. Nonetheless, under Gelsinger's leadership, investors have at least three good reasons to consider taking a long-term chance on Intel stock, despite the uncertainties.
Image source: Intel.
1. Intel has an inexpensive valuation
Intel's problems have brought one silver lining to the stock for potential new buyers: a low valuation. Intel stock sells at a P/E ratio of about 12, and this compares well with valuations over the last 2.5 years.
Where it does not compare well is with its more sought-after semiconductor peers. On the manufacturing end, TSMC sells for 33 times earnings. On the chip design end, TSMC clients (and Intel competitors) Advanced Micro Devices (AMD -5.44%) and Nvidia (NVDA -10.01%) are popular enough to generate P/E ratios of around 38 and 93, respectively.
Admittedly, Intel's stock underperformance over the last five years and the lack of revenue growth have weighed on the valuation. Its major peers have dramatically outperformed Intel stock, which grew by only 56% over the last five years.
INTC data by YCharts.
Moreover, even with the recent unexpected surge in chip sales related to the COVID-19 pandemic, Intel experienced only an 8% increase in revenue in fiscal 2020 compared with 2019. It has begun to fall again as revenue for the first six months of 2021 dropped by just under 1% compared with the first two quarters of 2020.
A small part of Intel's issue is its large size. Its $77.9 billion in 2020 revenue surpassed every other semiconductor company except for Samsung. That large sales volume means that for all its challenges, Intel remains an influential player in the chip industry. This at least provides a base upon which it could stage a comeback.
2. Intel's fabrication business gives it a leg up
Intel maintains much of this influence by remaining one of the few semiconductor designers that manufacture their own chips. Most of its competitors are chipmakers that rely on companies like TSMC to make the chips they design.
Admittedly, Intel's previous leadership appeared intent on depending at least partly on outsourced manufacturing. However, Gelsinger has changed direction, investing billions in upgrading and expanding production in the U.S. Not only does it want to produce better chips in the U.S., but it also has founded Intel Foundry Services, with the intent to provide foundry capacity for other chip companies, as TSMC does.
To this end, multiple sources have reported that Intel is in talks to buy GlobalFoundries for $30 billion. GlobalFoundries came into existence after AMD spun off its foundry operations. Today, semiconductor research site TrendForce estimates it holds a 7% share of the foundry market.
In addition, Intel might have finally overcome the production difficulties with its 10nm processor. The company revealed on its second-quarter earnings call that it has shipped more than 50 million Tiger Lake processors. Intel also expects to ship several million Alder Lake processors late this year. According to the website VideoCardz, an information leak from Intel claims Alder Lake can outperform AMD's fastest Ryzen CPU.
Whether those rumors prove true should become apparent when Intel releases Alder Lake. But AMD first released 7nm processors built by TSMC beginning in 2019. In comparison, Intel expects Meteor Lake, Intel's 7nm processor, will begin production in 2023. Hence, the race to develop the most productive CPUs remains an ongoing process.
3. National security concerns could play into Intel's hands
Another consequence of TSMC's technical lead is how much chip production has become centered around Taiwan. The island nation now claims about two-thirds of the world's chip production, according to TrendForce.
Unfortunately, China has long treated Taiwan as a rogue province and has vowed to re-incorporate it back into China for decades. While the prospect of a military takeover does not appear likely at this time, such an action would have tremendous implications for the economy if Taiwan's chip production came under China's control. Due to Intel's foundry presence in the U.S., it makes Intel stock a de facto insurance policy against such an action.
Additionally, the Senate approved $52 billion in subsidies for U.S-based semiconductor companies, which includes $39 billion for research and development and domestic production incentives. As the largest fab owner in the U.S., Intel would likely benefit from government subsidies directly, regardless of whether merger efforts with GlobalFoundries become a reality.
Investor takeaways
Intel's lost technical lead has led to weak price action in recent years. But it sells for a low P/E. Moreover, it has attempted to regain its technical lead, and the chip stock could benefit from serving as a fabricator for other companies. Furthermore, if Taiwan's political issues curtail production, massive amounts of business could shift to Intel overnight.
Regardless of whether investors believe in Intel's comeback story, all these factors combine to bolster the argument that Intel's stock is becoming increasingly worth the risk.
