Turnaround stories can be polarizing investments -- some see the long-term potential while others see a business full of problems to overcome. In this Fool Live video clip, recorded on Oct. 25, three of our contributors, Matt Frankel, Jason Hall, and Jon Quast, two bulls and one bear, battle it out over tech giant Intel (NASDAQ:INTC).
Matt Frankel: Intel, I am just honestly not interested in investing in a turnaround story in my dividend portfolio. Intel is very much a turnaround story right now. Their sales actually declined year-over-year, which very few tech stocks have seen sales decline.
Jason Hall: They just reported third quarter, it was up 5%.
Frankel: Sales down 1% year-over-year.
Hall: Tell you why, they divested part of their business and they adjusted that part that's no longer going to report out, so 5% of the core business. But yes, you're absolutely right.
Frankel: Whatever the case. You see now these other tech stocks were doubling sales year-over-year.
Hall: Absolutely. Absolutely. Your point, is actually it's kind of true, right? They divested something.
Frankel: You see, like even these big tech companies like Apple (NASDAQ:AAPL) or Microsoft (NASDAQ:MSFT) produce high-growth rates over these past years. Intel, the main problem I have is their turnaround story to capitalize on things like artificial intelligence and augmented reality and things like that, which they want to capitalize on.
It's going to take longer and cost more money than they originally thought. Just to kind of give you an example, they say they're going to spend between $25 and $28 billion dollars on capital investments next year. The highest they've ever spent in a single year has been $16 billion to date. They are expecting it to go up beyond 2022. They're expecting this turnaround to be very expensive. If successful, they see a $1 trillion market opportunity by 2030.
Now that's not going to be all theirs and it's going to cost them in the hundreds of billions to capitalize on it. You guys are clearly more bullish on Intel than me. I'm curious to find out why you guys ranked this, I think third and fourth [out of 10 dividend stocks], while I ranked this tenth.
Jon Quast: I don't think I'm bullish anymore Matt. Thank you.
Frankel: [laughs] I ruined it for you.
Hall: Jon, do you want to go first? I'll go. Go ahead.
Quast: I will just I will just say the reason that I did rank it so high is because to me, it is so cheap and I know that there's such a thing as a value trap. You don't want to invest in a stock just because of a cheap valuation. What matters is not what has happened, but what will happen going forward and that is the case with Intel as well. When I look at the semiconductor industry though, when I see what's ahead for that industry, it is really hard for me to discount any player in the space -- Intel included, despite past under performance. With a new plan in place, given the cheap valuation, it's really hard for me to say: "you can't--" like, "stay away from Intel." It's hard for me to come to that conclusion. But to Matt's point, it makes perfect sense what he's saying.
Frankel: If you see the chart on your screen right now, I can't name any other big tech stocks that have performed so poorly against the S&P 500 in the past five years.
Hall: Yes. There's no doubt about that and I will be blunt. One of the reasons I'm so interested in Intel and recently bought Intel is because of that chart you showed. The reason Intel is in that boat is because Intel did largely what Microsoft did for a long time in that it focused so much on its core business that it ignored all of the, not just the threats to it, but also the opportunities that existed. Right? Thinking about, like you said, the way you lead it Matt, I love it. You don't want to own a turnaround story in your dividend portfolio. That makes a tremendous, tremendous amount of sense.
Here's where I stand with Intel and the reason why I really believe in this turnaround story. First of all, I gets what Jon was talking about, talking about everything that's going on with the semiconductor industry. If you think about the enormous tailwinds, think about the hundreds of billions of dollars that have to be spent to expand capacity for what's to come. It is a gigantic tailwind. Then you take with that Intel's core business, that's actually still pretty important. That's it's fully integrated business, where it designs the chips and it tells its customers, OK, these are the chips, these are what they can do. And there's some interaction, right, to make sure like feature sets and that sort of thing. But basically it says, OK, here's what we have. How many do you want?
Then they buy them and they stick them in their PCs or their portable computers or they stick them in their data-centers or whatever. Then they have the foundry right where they, they do all of the manufacturing, right. They're fully vertically integrated. That's still a really important business. It generated, I don't know, $30 billion of operating cash over the past year. That's a pretty, pretty good business to be in to be a troubled business. But then here's the next part that has me a believer. Pat Gelsinger was brought on earlier this year as the CEO. He sees this enormous opportunity that is largely today Taiwan Semi (NYSE:TSM) and Samsung (OTC: SSNLF).
What is that opportunity? It's everybody else in the world that wants a chip that wants it for a specific purpose, that Intel is not going to make. Maybe they want to design it themselves, maybe they want to customize it a little bit. It's this massive opportunity to be fabless -- to design the chip and then have somebody make it. Now Intel has stood up this business that has a leader that reports directly to the CEO. They're not going to have these problems like Microsoft had where you have these internal silos that were fighting over resources and the political game that got in the way. They're not fighting for those resources anymore. They're looking at what the largest semiconductor manufacturers in the world that are not Intel are doing and seeing this huge opportunity.
I think in five years, this is going to be a different business than it is today. Their core business is still going to be really important. But five years from now, they will have invested, they will have stood things up, they will have people that are designing on their X86 architecture, that are using Intel, to make the processors that they want. I fully believe in it. It doesn't hurt that they're only paying out like 30% of their cash flows for the dividend right now, right? I think it's safer than we might realize.