Intel (INTC +4.49%) started 2021 with a bang, with shares of the chip giant accelerating in the first quarter of the year thanks to news that it may be gaining ground against rival Advanced Micro Devices (AMD +0.71%). However, Intel hasn't been able to sustain its impressive momentum, and the stock has given up all the gains it recorded in the early part of the year.
Shares of Intel are now trading close to the lower end of their 52-week range. Wall Street doesn't seem to be too optimistic about the company's prospects either, as the stock has an average price target of $54, which points toward a tepid upside from current levels.
Given the challenges Intel is facing, investors will probably think twice before buying it, while existing investors may consider cutting their losses by selling the stock. Let's look at both sides and see if it makes more sense to buy or sell Intel stock.
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Reasons to sell Intel stock
The biggest reason investors may want to sell Intel is because of the company's lack of competitive edge, which has translated into lukewarm revenue growth and margin erosion over the past three years.
INTC Revenue (TTM) data by YCharts
Intel has been forced to lower the price of its chips to compete with AMD, while customers have been flocking to Chipzilla's rival in the x86 processor market. This is reflected in Intel's latest quarterly performance, with its non-GAAP revenue increasing just 5% year-over-year in the third quarter to $18.1 billion.
AMD, on the other hand, is in red-hot form: Its third-quarter revenue shot up 54% year-over-year to $4.3 billion, driven by growth across all its business segments. What's more, AMD also increased its full-year guidance and expects to close 2021 with 65% revenue growth. Intel's non-GAAP revenue forecast of $73.5 billion would translate into a mid-single-digit drop over the prior year's revenue of $77.9 billion.
Even worse, analysts don't see a turnaround in Intel's fortunes in 2022. The company's revenue is expected to remain flat, while earnings are expected to decline to $3.70 per share from this year's estimated $5.28 per share. The long-term forecast doesn't appear to be bright either, as Intel's earnings are expected to clock a compound annual growth rate of just 3% for the next five years.
All of this indicates that Intel stock may continue to underperform. This is why investors might find it prudent to put their money in other fast-growing semiconductor stocks that could deliver a stronger upside.
Reasons to buy
There are three reasons why Intel stock seems worth buying despite gloomy analyst predictions.
First, the company pays a nice dividend. Intel has a dividend of 2.8% and a payout ratio of less than 27%. Intel paid out $1.4 billion in dividends in the third quarter, which was easily covered by its operating cash flow of $9.9 billion. The company has paid out $4.2 billion in the form of dividends in the first nine months of 2021, compared to $12.6 billion generated in free cash flow during the same period. Since Intel's dividend seems safe, it could turn out to be a good retirement stock.
The second reason to buy Intel is its cheap valuation. The stock has a price-to-earnings ratio of just 9.5 and a price to forward earnings ratio of 13.5. The low multiples aren't surprising, as the chip giant's top- and bottom-line prospects appear to be weak for the next year or so. Yet, the dirt-cheap multiples could appeal to investors looking to buy a potential turnaround candidate, especially considering that Intel will reward patient investors with a nice dividend.
This brings us to the third reason why investors may consider betting on Intel stock right now -- the possibility of a comeback. Intel has decided to roll up its sleeves and ramp up its capital spending in the coming years to become more competitive. The company plans capital spending of $25 billion to $28 billion in 2022, which explains the weaker bottom-line performance next year. The planned outlay would be a huge jump over this year's spending of $18 billion to $19 billion.
It is also worth noting that Intel's latest Alder Lake processors are giving AMD's processors a run for their money as per third-party tests. The Alder Lake chips are manufactured using Chipzilla's 10-nanometer process, which matches AMD's 7nm manufacturing node -- this explains why Intel has been able to aggressively price its latest processors and offer impressive performance.
Given that Intel has laid out an aggressive product roadmap for the next couple of years, it wouldn't be surprising to see the company regain its competitive edge. So Intel's potential turnaround, cheap valuation, and nice dividend could help attract investors, as it could turn into a growth stock, assuming its product development moves pay off and it recaptures its mojo.
