The start of a new year is a good time to search for underperforming stocks that could be on the verge of a rebound. One cheap tech stock that stands out is Intel (INTC 0.64%).
Intel has lost considerable market share to rivals in recent years, but it still commands the lion's share of chip sales, and CEO Pat Gelsinger has a clear strategy to retake the throne. Here are five reasons why Intel stock is a bargain.
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1. Don't underestimate the market share leader
Advanced Micro Devices has outmaneuvered Intel by outsourcing chip manufacturing to Taiwan Semiconductor Manufacturing, which helped AMD speed up innovation. Over the last five years, Intel's share of the CPU market has fallen from over 80% to 60%, according to data from PassMark.
But that means Intel is still in command of a $425 billion semiconductor industry. It is a trusted brand going back decades and possesses a superior manufacturing scale, which can't be discounted. One bright spot in 2021 was the strong demand for the Tiger Lake laptop processors, with 70 million units shipped. Tiger Lake is Intel's fastest-ramping notebook processor ever. Indeed, Intel is still alive and capable of much better performance.
2. Stable performance with room for improvement
Intel reported strong demand across all segments for the third quarter, with record results from data centers, autonomous driving solutions (Mobileye), and the Internet of Things. Revenue grew 5% year over year, with earnings per share advancing by 64%.
During the Q3 earnings call, CEO Pat Gelsinger said, "Demand remains strong across all of our segments, and I continue to believe that we're just starting a cycle of sustained growth, which we are well-positioned to capture."
3. Growth catalysts
Intel announced in December plans to take Mobileye public, which could unlock $50 billion in value. Intel will maintain majority ownership of the driverless solutions unit. That's just the beginning of upcoming strategic moves that could send the stock higher.
To regain industry leadership by 2025, Intel is changing how it manufactures chips. Intel has moved slower than AMD because it does everything in-house, including the design and manufacture of its products.
Going forward, Intel plans to source some components from TSMC, which should speed up its chip development. Intel is spending $20 billion to build new chip plants in Arizona. It also plans to set up its own foundry service to compete with TSMC in making chips for other companies.
Moreover, management has laid out a clear roadmap for its chip technology over the next four years. The current production schedule calls for moving from 10-nanometer (Intel 7) process nodes to 7-nanometer (Intel 4) production by late 2022. Intel 20A, previously known as 5-nanometer, will go into production by late 2024.
These announcements are not going unnoticed by investors. If Intel executes along this timeline, the market will likely reward the stock with a higher valuation.
4. Returns on capital are improving
Intel is loaded with plenty of cash resources to reinvest in new technologies. Over the last four quarters, it generated $17 billion in free cash flow, and that's after spending $15 billion on research and development.
Free cash flow has increased 51% in total over the last five years, and Intel's return on invested capital -- a key measure of profitability -- has also improved from 12% to 18%.
5. Attractive valuation and dividend yield
Intel's consistent free cash flow funds a growing dividend to shareholders. The dividend per share has increased 32% over the last five years to a current quarterly payment of $0.3475 per share. That brings the dividend yield to 2.6%, more than twice the yield of the S&P 500 index. Plus, Intel only pays out 32% of its free cash flow in dividends, providing ample room to continue increasing it.
What's more, the market is not giving Intel any credit for its growth plans. The shares trade for just 10 times management's adjusted earnings guidance for 2021.
As it speeds up innovation and gets back on track, there's a good chance Intel will outperform the broader market from these levels.
