When practically everyone says something will happen in the financial markets, typically something else actually happens. That's a foundational belief of contrarians, and that belief is being tested now as Intel (INTC -1.06%) is so unloved that it may, indeed, seem unlovable.
If I had a dollar for every venomous mention of "losing market share," "value trap," "catching a falling knife," and "eating Intel's lunch" (usually referring to Advanced Micro Devices), I'd be fabulously wealthy by now. Much more difficult than pointing out the obvious potholes on Intel's long, perilous road to recovery is identifying and articulating the bullish side of the argument.
I'm happy to take up that challenge and accept any ridicule I may incur in the process. I'm certainly not recommending putting all of one's chips on this chipmaker, but the bearish argument against Intel stock has become so obvious that anyone who calls themselves a contrarian ought to at least consider the other side of the trade.
Accentuating the positive
In all fairness, I can't just dismiss Intel's disappointing Q4 2022 results and guidance. To recap, Intel posted $14 billion in revenue, down 32% year over year. This result, however, was only slightly short of Wall Street's consensus estimate of $14.49 billion. Much more worrisome was Intel's non-GAAP (adjusted) earnings per share of $0.10, which was less than half of the $0.21 analyst consensus estimate.
Perhaps Wall Street expected too much, though. Global PC shipments slumped 28% year over year in the quarter ended in December, indicating conditions in which one of Intel's bread-and-butter businesses couldn't flourish. Besides, hardly anyone's bothering to mention Intel's revenue improvements in the company's network and edge (up 11%), Mobileye (up 35%), accelerated computing systems and graphics (up 8%), and foundry services (up 14%) units. And while the company's critics' favorite phrase is "market share," Intel reportedly gained market share in the PC CPU market share during 2022's second half of the year, and CEO Pat Gelsinger envisions this trend continuing in 2023.
Take note, value and income investors
If there's an overlap between the contrarian and value approaches to investing, then anyone who claims to zig when others zag ought to consider Intel stock a steal. A head-to-head comparison with Intel's most obvious domestic rival should drive the point home: Intel sports a P/E ratio of 14.4, a price-to-book value ratio of 1.78 (I typically prefer below 5, and under 2 is even better), and a price-to-sales ratio of 2.4 (I like this to be under 5, and better yet, less than 3). In contrast, Advanced Micro Devices appears pricier and possibly even overbought with a P/E ratio of 45.2, a P/B ratio of 23.5, and a P/S ratio of 6.3.
The gaping void between those numbers speaks volumes, and bear in mind that Intel still maintains a greater than 70% share of the PC and server processing chip markets. So, investors have a rare opportunity to buy a still-dominant tech company at a rock-bottom multiple. Granted, Intel is less dominant than it was a half-dozen years ago, but that's how the stock got so cheap in the first place. Besides, Intel's recovery is a marathon, not a sprint, and income-oriented investors can collect a 5%-ish annual dividend yield -- which, by the way, Intel didn't cut despite the pundits' projections and which Gelsinger is committed to maintaining.
Low expectations are a problem now, and an opportunity later
Finally, it's time to address the elephant in the room: What alarmed analysts and investors more than Intel's Q4 results was the company's downbeat Q1 2023 guidance. For the current quarter, Intel expects to generate $10.5 billion to $11.5 billion in revenue, versus Wall Street's consensus estimate of $13.93 billion. The trading community also wasn't too pleased to hear management predicting a first-quarter net loss of $0.15 per share.
Intel's Q1 guidance prompted shock and horror, and Bernstein analyst Stacy Rasgon was typical in calling it "astonishingly bad." Yet that's exactly the kind of blood-in-the-streets chatter that dyed-in-the-wool contrarians should want to hear. After all, it's not as if Gelsinger's oblivious to Intel's problems, which didn't just suddenly begin the day he took the CEO role two years ago. Gelsinger's mandate to restore Intel's credibility is a "five-year assignment," and the chief executive knows full well that his company stumbled, lost share, and lost momentum. For what it's worth, Gelsinger acknowledged that Intel's objective is to "regain leadership for the long term in this critical market," seemingly suggesting that current-quarter failure is a foregone conclusion but subsequent quarters could bring pleasant surprises.
But then, pessimistic foregone conclusions are supposed to be a contrarian's playground. If everybody and their uncle assumes a horrific outcome for Intel in Q1, could this be a setup for a "not as bad as expected" rally? It's a possibility worth considering -- and just maybe, there's a long-Intel trade worth making not just because you believe in a long-term comeback narrative, but also for the almost inevitable relief that follows visions of worst-case scenarios.
