Intel shares: No half-measures (NASDAQ: INTC)

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Intel (Nasdaq: INTCThe new plan may collapse before it is lifted off the ground. One of the main reasons behind the new chip production trend taken by CEO Pat Gelsinger was similarly optimistic stock sentiment to TSMC (TSM). We know that TSMC is focused on laser chip production and that Intel will need to significantly increase capital expenditures to compete with TSMC. There are a lot of uncertainties and hurdles for Intel that could limit any improvement in stock returns over the next few years.

Intel, TSMC and Samsung have announced plans to invest billions of dollars to increase chip production capacity and transition to next-generation technology. However, there is certainly a risk of increased production due to intense competition. Intel will need to do some housework to catch up with TSMC and there is still a good chance that Intel will show weak growth metrics in the next few years. Intel announced a whopping $28 billion in capital spending in 2022, but TSMC is already beating that scale by announcing more than $40 billion in capital expenditures this year.

This can make the stock a value trap and test the patience of the company’s most avid believers. At the current stage of the transformation, it’s better to wait and watch management’s next moves than to jump in for some cheap stock.

Imitation is the best form of flattery

Intel announced one of the most ambitious plans in its corporate history. It is generally believed that the CEOs of a company are chasing earnings or revenue growth. This is not entirely true. The top executives of most companies are looking to improve the stock’s trajectory. If Wall Street rewards another competitor for its strategy, management will look to replicate that strategy. This can backfire because the new strategy may not benefit the company’s core business.

We can see a number of examples of this approach. Apple (AAPL) is trying to build a streaming business that will cost it more than $100 billion over the next decade. Getting into this business is likely due to the massive rating given to Netflix (NFLX) prior to the pandemic. But the latest correction in Netflix stock shows the limits of streaming activity. Apple will also face competition from Amazon (AMZN), Disney (DIS), Netflix and others which will limit the growth of its subscription to the streaming business.

The seismic change in Intel’s strategy in 2021 may also be due to TSMC’s rapid valuation growth. In the 12 months prior to the announcement of chip production by the new Intel CEO, TSMC nearly quadrupled its share price. This could be a major incentive for Intel’s management to pursue a stronger chip production strategy.

Intel and TSMC stock price movement ahead of Intel's strategic turnaround in 2021

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Figure 1: Intel and TSMC stock price movement before the strategic turnaround by Intel in 2021.

Rethink the new strategy

It’s been over a year since Intel’s new CEO announced that “Intel is back. Old Intel is now new Intel.” Intel’s future stock trajectory now depends on the success or failure of this strategy, and therefore it is important to look at new trends in this business. There were supply chain issues last year and both Intel and TSMC announced massive investment plans in the USA, Europe and Asia.

Intel's weak revenue growth has once again shaken investor confidence.

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Figure 2: Weak revenue growth has shaken investor confidence once again.

Intel once again announced results that shook investor confidence, which led to another correction in the stock. There was also a decline in revenue forecasts for the full year. Wall Street has not been kind to companies that report very low rates of revenue growth. Intel management has already announced that the next few quarters will be particularly difficult with massive capital spending. At the same time, the revenue growth rate will be low in the single digits. We must take these expectations to the extreme. If Intel delays further in chip development, the headwinds toward revenue growth will increase. Intel has already announced an investment of tens of billions of dollars to build new factories. Hence, course correction will be impossible in the next few years.

No to half-solutions

Intel shares are very cheap which has increased their attractiveness to some value investors. However, investors will need to fully support Intel’s new moves. We may see a rollercoaster ride for Intel stocks in the next few quarters as the company launches new products and makes progress toward building new factories. There are a number of challenges Intel is facing that could derail any momentum in the stocks. One of the biggest is the growing competition. While Intel has announced multi-billion dollar investments for the USA and Europe, TSMC has bolder plans for its future capital investments. TSMC focuses on lasers over manufacturing which gives it an edge over Intel.

Intel has announced capital spending of $28 billion, however, TSMC has also boosted its capital expenditure and plans to spend $40 billion to $44 billion in 2022. As Intel tries to achieve parity in terms of chip size, it may not be able to come close to spending capacity TSMC. This will be a major headwind for Intel as TSMC can continue to expand its manufacturing market share. Higher spending by TSMC could hurt Intel’s margins in the future.

Impact on the share price

The biggest question facing investors is whether the Intel stock is a value investment or a value trap. There are a number of obstacles which the management has to overcome in order to reach its target in terms of manufacturing capacity. Even if these goals are reached, there is a strong possibility that TSMC will continue to improve its technology and manufacturing leadership on the back of its massive capital expenditures. It’s highly unlikely that Intel will come close to TSMC’s spending plans even by 2025.

As mentioned above, the best case scenario for revenue growth at Intel is low single digits in the near term. If the current roadmap is successful, Intel may be able to achieve double-digit revenue growth in 2025 according to management. On the other hand, TSMC is already forecasting 35% growth in 2022 and a strong growth chart in the next few years.

Intel and TSMC - Comparison of Revenue Growth, Capital Expenditure, and Futures EPS Ratio

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Figure 3: Comparison of Revenue Growth, Capital Expenditure, and Forward PE Ratio between Intel and TSMC.

TSMC’s revenue estimates show that the company will reach $100 billion in average revenue by 2024. It is likely that future capital expenditure will also rise in line with revenue growth. This will make it difficult for Intel to catch up with TSMC in the manufacturing race despite getting tailwinds from CHIPS and subsidies in Europe. We can also see that Intel stock is not very attractive in terms of futures PE ratio. On this metric, the company is trading above the TSMC valuation scale even though there is a significant difference in revenue and capital expenditure pathways.

Intel’s new management grand plan faces enormous challenges due to competitive pressure. While the stock has a trailing PE of less than 7, it can still be a very valuable trap. Intel’s total stock returns will likely be lower than those of the broader market in the next few years making it a poor bet.

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Over a year ago, Intel announced a massive change in strategy with a greater focus on manufacturing. This strategy could have been strengthened due to the rapid growth of TSMC before 2021. However, it will be difficult for Intel to bridge the gap with TSMC in terms of manufacturing. Despite announcing a massive increase in capital expenditures and the possibility of subsidies, Intel still lags behind TSMC’s capital expenditure budget. TSMC and Intel’s revenue growth is going a completely different path. On the current growth trend, TSMC should reach $100 billion in average revenue in 2024 which will allow the company to ramp up its capital spending plans.

Wall Street rarely rewards stocks in companies that show poor revenue growth. Intel has already announced low single-digit revenue growth estimates for the next few quarters. This alone will reduce any upward momentum in the stock. The stock itself isn’t cheap when we look at the forward P/E multiple and there may be additional pressure in margins as competition heats up. Investors looking for a stock of value should look to other potential candidates rather than Intel stock.

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