The S&P 500 includes some of the best companies in the world. Among the worst performers in the index this year are industry-leading businesses that could be undervalued.
While the index is up 11% year to date, shares of Intel (INTC 2.21%), Starbucks (SBUX +1.02%), and Tesla (TSLA +3.29%) are down 39%, 19%, and 29%, respectively. We'll review why these stocks have slumped and whether investors should take advantage of the dip.
1. Intel
The skyrocketing demand for processors used for artificial intelligence (AI) is attracting investor interest in semiconductor companies, but Intel is struggling to keep up with competitors. The company missed Wall Street's revenue estimates last quarter, which sent the stock tumbling 39% year to date. While the shares look cheap, Intel faces an uphill battle against competing data center suppliers, potentially limiting the stock's upside.
NASDAQ: INTC
Key Data Points
The stock is tempting at these lower share prices because Intel is still the dominant supplier of central processing units (CPUs) used in consumer PCs. But its focus on CPUs is a disadvantage as data centers shift more investment to the more powerful graphics processing units (GPUs) needed for AI training.
Intel has invested billions to build a U.S.-based manufacturing base and has a long history of producing profits and paying dividends to shareholders. The tech titan has the resources to compete, but it might be stretching itself too thin. It has invested a lot of capital to build its own chip foundry that will manufacture chips for other companies, in addition to networking and software solutions for AI.
These investments have eaten a hole in Intel's bottom line. Trailing-12-month net income has fallen to $4 billion over the past year, down from $24 billion a few years ago. Moreover, Advanced Micro Devices has taken significant market share from Intel in consumer PCs and servers in recent years. AMD's innovation in delivering solid processing performance at competitive price points might make it very difficult for Intel to regain leadership.
Investors should probably avoid the stock for now. Intel might continue to grow its revenue as the semiconductor industry expands in the coming years, but if AMD continues to gain market share, Intel will keep struggling to deliver meaningful upside for shareholders.
2. Starbucks
Starbucks is another bellwether business that has fallen out of favor. The stock is down 19% year to date and is offering investors the best value in years.
NASDAQ: SBUX
Key Data Points
Starbucks shares slumped after the company issued an unusually weak earnings report in April. Revenue fell slightly year over year in its fiscal second quarter, driven by a 3% decline in comparable-store sales in North America and an 11% drop in China. The weak sales performance also pressured the company's earnings.
Unlike Intel, Starbucks' problem is not a result of external issues, such as intensifying competition, but reflects a soft environment in retail spending, as other retail companies have also reported weak sales recently.
Starbucks is one of the strongest consumer brands. Despite operating over 38,000 stores worldwide, management still sees room for expansion. The negative is that, with such a large base of stores, the company will be vulnerable to occasional softness in the economy.
The stock's value can be easily seen in the dividend yield. Starbucks currently pays a quarterly dividend of $0.57 per share, which brings the dividend yield to 2.92%, more than double the S&P 500 average. That's a great deal for a company that should continue to grow earnings -- and the dividend -- in the coming years.
3. Tesla
Shares of Tesla are down 29% so far this year. The electric vehicle (EV) leader's first-quarter revenue fell 9% year over year, which is not the performance investors are used to seeing from this high-octane company. Tesla experienced some disruptions to operations in the quarter, including an arson attack at one of its Gigafactories and challenges related to the production of the updated Model 3. The company also blamed weak near-term demand for EVs.
NASDAQ: TSLA
Key Data Points
Wall Street analysts currently expect Tesla's revenue will increase just 2% this year. Lower growth will be a limiting factor for the stock's upside potential this year. However, the stock's expensive valuation, with the shares trading at a forward price-to-earnings ratio of 69, implies that investors believe its long-term growth is far from over.
Tesla is still a stock worth holding because it could have millions of cars on the road in the coming years. A key catalyst for that will be its upcoming introduction of the Cybercab robotaxi in August. Tesla is a play on not just the continued growth of consumer EVs but also the adoption of autonomous vehicles across the transportation industry.
The advantage for Tesla is its growing capabilities in artificial intelligence. The EV maker's self-driving car software still has a ways to go to reach its full potential, but Tesla is making rapid progress to increase the capabilities of its driverless system. The company has already installed 35,000 Nvidia H100 chips for AI training and plans to reach 85,000 by the end of this year.
Tesla is an AI software company as much as a maker of electric vehicles. It earned a healthy profit of $13 billion over the last year. This means investors are getting better value for Tesla stock, and that should translate into better returns once the business is growing again.
