Intel (INTC -2.15%) stands as one of the world's largest designers and manufacturers of semiconductors. Chips seem to be used in almost everything these days and will only become more important going forward, but the company has been struggling lately due to some missed opportunities and tough competition.
If you're thinking about investing in the semiconductor giant, read on for a look at bullish and bearish scenarios that could shape the stock's performance over the next five years.
Intel has avenues to a comeback and the stock looks cheap
Intel stands as one of the world's largest designers and manufacturers of semiconductors. The company's failure to get in on the mobile space, chip designs that have fallen behind the curve, and recent gains by Advanced Micro Devices (AMD 0.19%) in key market segments have led to stock performance that's lagged far behind the S&P 500 index over the last decade. But shares could offer an attractive risk-reward profile at today's prices.
Intel stock now trades down roughly 35% year to date and roughly 49% from the high that it hit in April 2021. At current prices, the stock trades at less than 15 times this year's expected earnings. It also pays a dividend yielding roughly 4.3%.
Intel has a deal with semiconductor equipment leader ASML Holding (ASML 1.23%) to purchase the first of the company's next-generation extreme-ultraviolet (EUV) lithography machines. Intel is on track to begin using the first of these high-numerical aperture (High-NA) machines in 2024 or 2025, and the new technologies should help the semiconductor giant take its chip scaling to the next level while also reducing costs and increasing manufacturing output.
Having high-performance chip designs ready to take advantage of early access to ASML's High-NA machines would be a big win and could radically alter the narrative surrounding the stock. Intel is also building new factories and making massive investments to increase its overall fabrication capabilities, and it should have opportunities to significantly increase sales and earnings as it expands manufacturing services to third parties.
But major bearish risks remain for Intel
With big top- and bottom-line misses and downward guidance revisions, Intel's second-quarter performance was very disappointing, and the company has an uncertain outlook despite occupying a prominent position in an essential industry. However, AMD will likely continue gaining share in the servers market, and Qualcomm is also gearing up to reenter the space. AMD is also gaining share in the computer central processing unit (CPU) market, and Intel is facing softer demand and declining margins in the category.
With current headwinds facing the business and the likelihood that the chip giant will need to make huge investments in order to get its technologies up to speed with competitors, there's a risk the company will wind up cutting its dividend. Slashing the dividend would likely cause Intel's stock price to plummet, but choosing to maintain it could mean that the company shies away from making sufficient investments to shore up its long-term competitive position.
The importance of the semiconductor industry along economic and national security lines is prompting the U.S. to subsidize the growth of the industry domestically, and Intel is poised to benefit. The semiconductor giant has the advantage of already operating a large chip fabrication operation to complement its chip-designing component, but the company has been coming up short when it comes to delivering designs that outperform the competition.
The overall demand outlook for semiconductors is very promising, and it wouldn't be shocking to see Intel outperform the market over the next decade, but there are probably better buys in the semiconductor space. If you're looking to benefit from the ongoing rise of the chip industry, I'd buy ASML or AMD before Intel.
So should you invest in Intel?
Intel stock looks cheap on the heels of recent sell-offs, and the stock could have big long-term upside if the company gets back to delivering design wins. On the other hand, recent business performance hasn't been inspiring, and it's unclear whether the company will be able to stop competitors from gaining market share. The stock could be a good fit if you're on the hunt for potential turnaround plays, but investors should approach it with the understanding that Intel's industry position appears to be slipping.