The prospect of tighter U.S. restrictions on exports to China and recent comments from presidential candidate Donald Trump knocked some of the wind out of chip stocks. Semiconductor stocks slid as the Biden administration floated the prospect of tougher trade restrictions on the industry while Trump suggested that if elected, he would want Taiwan to pay the U.S. for its defense. Taiwan, home to leading foundry operator Taiwan Semiconductor Manufacturing (TSM 1.86%), captures about 62% of the revenue generated globally by chip foundries, according to TrendForce. Concerns about the future led to a sell-off in TSMC as well as stocks like Nvidia (NVDA 0.80%) and Advanced Micro Devices (AMD +1.60%), which depend on TSMC's fabs for production and also reported significant sales to China.
One of the few stocks that responded positively to this news from the presidential candidates was Intel (INTC +2.35%), whose stock price spiked sharply higher in Wednesday trading before pulling back for a modest gain. And while that surge of enthusiasm waned quickly, it was a reminder of why serious semiconductor industry investors should have at least some Intel stock in their portfolios.
The state of Intel
Admittedly, Intel's heyday is likely long behind it. It lags behind AMD on the chip design side of the business, and its new third-party fab operation, Intel Foundry Services (IFS), is behind TSMC and Samsung in terms of process technology.
However, Intel has the advantage of location: Most of its foundries are outside of East Asia. Thus, when political figures raise the prospect of trade restrictions or say things that intensify concerns that China could invade Taiwan, investors look to Intel as a safer bet.
The supposition that China will invade Taiwan is speculation. What is not speculated is that the chip foundry industry is concentrated in Taiwan. To this end, the U.S. and other Western governments are offering chipmakers tens of billions of dollars worth of subsidies to build more advanced fabs in the U.S. and Europe.
Such subsidies benefit Intel and its plans to build state-of-the-art fabs. Additionally, since it is buying the most advanced chip-manufacturing equipment from ASML, its potential to catch up to its competitors rapidly is better than some might assume.
Making sense of Intel's financials
As a result of its investments in building out manufacturing capacity, Intel's financials are improving, but still struggling. In the first quarter, its revenue rose 9% year over year to $13 billion. That was a notable improvement from its 14% revenue decline in the full year of 2023.
Amid heavy investments in its future, it spent 15% more on operating expenses. Despite that increase, its Q1 net loss shrank to $381 million, a small fraction of the $2.8 billion it lost in Q1 2023.
Management did not forecast significant revenue growth for Q2. Consequently, its stock has fallen by more than 30% so far this year. Also, if there's no political turmoil regarding Taiwan, investors should not expect the semiconductor stock to outperform the S&P 500 anytime soon.
NASDAQ: INTC
Key Data Points
Still, this stock trades now at a price-to-sales ratio of less than 3 -- a massive discount to its peers.
INTC PS Ratio data by YCharts.
However, the ultimate measure of Intel's low valuation is its price-to-book-value ratio of 1.4. This means its total market cap is only 40% more than the market value of its assets. According to the Stern College of Business, the average book-value multiple in the chip industry is above 7, implying Intel stock is significantly oversold.
Intel as a hedge
Given its current position, Intel is a vehicle investors can use to hedge their positions in chip stocks more closely tied to China and Taiwan, and shares bought now could eventually turn out to have been a low-cost investment in an industry leader.
Admittedly, Intel stock is unlikely to beat the indexes anytime soon, and its massive investments in itself are no guarantee it will catch up to its peers competitively.
However, it is likely to close much of the gap over time, and its current and future operations in the U.S. and Europe protect the semiconductor industry from possible turmoil in East Asia. When one also considers its low valuation, an Intel position can protect chip stock investors and possibly produce significant returns in the long term.
