US chipmaker Intel (INTC) saw its share price fall 17 per cent in 2020 as it lagged strong gains on the broader semiconductor market. The company has lost market share to rival AMD as it has faced challenges in manufacturing new chips and major shareholders in the company have made their concerns public.
But Intel stock is up 27 per cent in the past month compared with a 12 per cent gain in the benchmark ETF, with a new CEO set to take the helm. Is the company on track to turn around, and is Intel stock a good buy at this time?
Ready to get back on track: Intel sets out a new course
Intel announced on January 13 that chief executive officer (CEO) Bob Swan will step down, with former Intel CTO Pat Gelsinger returning to the company to take over from February 15.
In December, an open letter from investor Third Point to Intel’s board highlighted the need for several changes to address concerns about its multiple-year slip in manufacturing, the threat posed by AMD’s success as well as custom products from customers such as Apple, and turnover of top talent, noted Morgan Stanley. Some analysts have expected Intel to catch up on its manufacturing lag by outsourcing some component production to Taiwan Semiconductor Manufacturing Co. (TSMC).
Analysts at Morgan Stanley said: “Numerous delays in manufacturing technology… have been a significant impediment to Intel’s roadmap, and outsourcing to TSMC is likely to be accretive to both margins and cash flow.”
In its fourth-quarter earnings results on January 21, Intel announced a one per cent year-on-year decline in revenue to $20bn, exceeding its October guidance by $2.6bn. The full-year 2020 revenue totalled a record of $77.9bn, up by eight per cent year on year. The company also announced a five per cent increase in its dividend from $1.32 to $1.39 per share.
Intel said that it started production of its new generation of processors during the fourth quarter and it will ramp up during the first quarter. The company expects its first-quarter revenue to decline by 12 per cent year-over-year to $17.5bn, with strong demand for notebooks and PCs continuing during the Covid-19 pandemic, while desktop volumes are expected to fall.
Incoming CEO Gelsinger confirmed on a conference call with analysts that Intel will increase its use of outsourcing, but remains committed to internal manufacturing for the long term: “I am confident that the majority of our 2023 products will be manufactured internally. At the same time, given the breadth of our portfolio, it’s likely that we will expand our use of external foundries for certain technologies and products.”
Gelsinger commented: “There is an enormous opportunity ahead for Intel, but to be able to seize these opportunities, we have to deliver the best products and stay ahead of our customers’ needs.”
The Intel share price initially spiked by three per cent after the earnings release, but subsequently fell back by 4.6 per cent in after-hours trading.
Intel stock reached the $67 per share level in February 2020, the highest level since the dot-com boom (and bubble) in 2000. But the share price dropped below $45 in March 2020 when the impact of the pandemic disrupted financial markets. It moved back up to approach $64 in early June, but struggled for the rest of the year and dropped to the $44 level in October. The stock ended the year just under $50 per share, with expectations of a change in strategy under Gelsinger lifting it back towards $60 per share. Gelsinger is expected to make further announcements about the direction of the company once he assumes the CEO role.
What is the future of Intel stock? What do the changes in strategy suggest for the share price in 2021 and beyond?
Intel stock forecast: analysts look to new leadership for share price gains
The average 12-month price target from 43 analyst ratings is $60.47 per share, ranging from a low of $40 and a high estimate of $85 per share, according to MarketBeat. There are 19 buy ratings, 10 sell recommendations and 14 analysts rate the stock a hold.
Analysts at BMO Capital Markets upgraded their Intel share price forecast in a note on January 14 to $70 from $50 per share and raised the rating to outperform, adding: “We have seen time and again how the right person at the helm can affect change. While we do not expect any near-term big changes, the richness of experience that Pat Gelsigner brings from his prior tenure at Intel as well as his experience running VMware, we believe he is the right person who can address the daunting, but not insurmountable challenges that Intel faces.”
BMO’s price target assumes that “shares start to shake off the big discount to the S&P” and the overall semiconductor sector, and trade at a price-to-earnings (P/E) multiple of 14 times its 2022 earnings per share estimate of $5, the analysts said.
Analysts at Needham upgraded the stock to buy from hold on January 14 with a price target of $70 per share on the appointment of Gelsinger and an expected outsourcing announcement.
The analysts commented: “With his technical acumen, we strongly believe Mr Gelsinger will be able to identify shortfalls in Intel’s current processor product roadmap and put Intel back on a path toward reestablishing its processor performance leadership position… Should Intel be able to stem its market share losses, the company’s earnings outlook should improve and its valuation multiple expand.”
On January 13, Barclays raised its INTC stock forecast from $48 per share to $50 per share: “We do believe this is a step in the right direction as a technologist resumes the CEO role but the first real step for us to become more constructive is still an admission of the challenges the company faces… Investors need to build confidence in this new management team and that will take time.”
Stock forecasting service WalletInvestor predicts the stock to gradually trade higher in the coming years, from an average of $58.91 per share in February to $60.98 by December 2021 and $64.43 by December 2022, leading to an Intel stock forecast 2025 of $74.81 per share.
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