Intel Stock: No Half Measures (NASDAQ:INTC)

Intel (NASDAQ: INTC) the new plan could fall apart before it takes off. One of the main reasons for the new direction of chip production undertaken by CEO Pat Gelsinger was to bolster similar stock market sentiment. at TSMC (TSM). We know that TSMC is focused on laser chip production and Intel would have to increase investment massively to compete with TSMC. Intel faces many uncertainties and hurdles that may limit any improvement in stock market returns over the next few years.

Intel, TSMC and Samsung have announced plans to invest billions of dollars to increase chip production capacity and move to next-generation technology. However, there is certainly a risk of overproduction due to intense competition. Intel would need to do some circuitry to catch up with TSMC and there’s still a good chance that Intel will show lackluster growth metrics over the next few years. Intel announced a massive investment of $28 billion in 2022, but TSMC is already exceeding that scale by announcing over $40 billion in investment this year.

This can make the stock a value trap and test the patience of the firm’s most staunch supporters. At the current stage of the turnaround, it is better to wait and watch the next moves in direction instead of rushing to get low priced stocks.

Imitation is the best form of flattery

Intel has announced one of the most ambitious plans in its history. It is generally thought that the top executives of a company seek profit or revenue growth. This is not entirely true. The senior executives of most companies are looking to improve the trajectory of stocks. If Wall Street rewards another competitor for its strategy, management will seek to replicate that strategy. This may backfire as the new strategy may not benefit a 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. Entry into this business was likely due to the massive valuation given to Netflix (NFLX) before the pandemic. But the recent Netflix stock correction shows the limits of a streaming business. Apple will also face competition from Amazon (AMZN), Disney (DIS), Netflix and others, which will limit its streaming subscription growth.

Intel’s drastic change in strategy in 2021 could also be due to the rapid growth in TSMC’s valuation. In the 12 months before Intel’s new CEO announced chip production, TSMC had nearly quadrupled its stock price. This could have been a big incentive for Intel management to pursue a stronger chip production strategy.

Figure 1: Intel and TSMC stock price movement prior to Intel’s strategy change in 2021.

Review the new strategy

It’s been over a year since Intel’s new CEO announced that “Intel is back. The old Intel is now the new Intel.” Intel’s future market trajectory now hinges on the success or failure of this strategy, so it’s important to look at new trends in this sector. There have been supply chain issues over the past year and Intel and TSMC have announced massive investment plans in the US, Europe and Asia.

Figure 2: Weak earnings growth has again shaken investor confidence.

Intel again announced results that shook investor confidence, leading to another correction in the stock. There was also a reduction in the full year revenue forecast. Wall Street has not been kind to companies that show very low revenue growth rates. Intel management has already announced that the coming quarters will be particularly difficult with massive investments. At the same time, the revenue growth rate would be in the low single digits. We should take this forecast as an upper limit. If Intel falls further behind in chip development, the headwinds to revenue growth would increase. Intel has already announced tens of billions of dollars in investments to build new factories. Consequently, a course correction would be impossible in the next few years.

No half measures

Intel’s stock is very cheap, which has increased its appeal to some value-oriented investors. However, investors are expected to fully support Intel’s new initiatives. We could see a rollercoaster ride for Intel shares over the next few quarters as the company launches new products and moves toward building new factories. Intel faces a number of challenges that can derail any stock market momentum. One of the biggest is growing competition. While Intel has announced billions of dollars in investments for the US and Europe, TSMC has bolder plans for its future capital investments. TSMC is focused on laser manufacturing, which gives it an edge over Intel.

Intel has announced capital expenditures of $28 billion, however, TSMC has also increased its capital expenditures and expects to spend between $40 billion and $44 billion in 2022. As Intel attempts to achieve parity in terms of chip size, it may never be able to come close to TSMC’s spending capacity. This is going to be a major headwind for Intel as TSMC may continue to expand its manufacturing market share. Higher spending by TSMC could also hurt Intel’s margins going forward.

Impact on share price

The biggest question in front of investors is whether Intel stock is a value investment or a value trap. There are a number of hurdles that management will need to overcome in order to achieve its goal in terms of manufacturing capacity. Even if these goals are achieved, it is quite possible that TSMC will continue to improve its technology and manufacturing lead through its massive capital expenditure. Intel is highly unlikely to come close to TSMC’s spending plans even by 2025.

As mentioned above, Intel’s best-case scenario for revenue growth 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 has already predicted 35% growth in 2022 and a strong growth track in the next few years.

Figure 3: Comparison of revenue growth, capex, and forward PE ratio between Intel and TSMC.

TSMC’s revenue estimates show that the company will reach a revenue rate of $100 billion by 2024. It is likely that the future capital expenditure rate will also increase based on revenue growth. This will make it difficult for Intel to catch up with TSMC in the manufacturing race despite the tailwind of the CHIPS Act and subsidies in Europe. We can also see that Intel stock is not very attractive in terms of forward PE ratio. According to this metric, the company is trading higher than TSMC’s valuation metric despite a massive difference in revenue and investment trajectories.

Intel’s new management’s grand plan faces huge challenges due to competitive pressure. Although the stock has a PE ratio of less than 7, it can still be a high value trap. Intel’s stock total returns are likely to lag those of the broader market over the next few years, making it a poor bet.

Key takeaway for investors

More than a year ago, Intel announced a dramatic shift in strategy with a greater focus on manufacturing. This strategy could have been promoted due to the rapid growth of TSMC before 2021. However, it will be a big challenge for Intel to close the gap with TSMC in terms of manufacturing. Despite the announcement of a massive increase in capital expenditure and the possibility of obtaining subsidies, Intel is still far behind TSMC’s capital budget. TSMC’s and Intel’s revenue growth follows a completely different trajectory. Given the current growth trend, TSMC is expected to reach a revenue rate of $100 billion in 2024, which will allow the company to further increase its capital expenditure plans.

Wall Street rarely rewards stocks of companies that show low revenue growth. Intel has already announced low-single-digit revenue growth estimates for the next few quarters. This alone will reduce any bullish momentum in the stock. The stock itself is not cheap when we look at the forward PE ratio multiple and there could be further margin compression as competition intensifies. Investors looking for a value stock should look to other potential candidates instead of Intel stock.