There’s no denying that Intel (INTC) stock is cheap. Shares in the semiconductor giant trade for a low forward price-to-earnings (P/E) ratio of 13x. That’s far below the valuation of its main chip rivals, Advanced Micro Devices (AMD) and Nvidia (NVDA), which trade for around 44x and 54.9x earnings, respectively.
Much of this valuation discrepancy has to do with the company’s anemic growth and its many past missteps. But with a new CEO, Pat Gelsinger, who could turn around its ship, Intel might be able to make a comeback. If it does, earnings could improve, and the market may in turn reward it with a much higher forward valuation multiple.
That said, given its low valuation, possible improvements ahead for its business, and its solid 2.6% dividend yield, I’m bullish. The upside from proving its critics wrong outweighs the risk that it further disappoints investors.
INTC Stock: Still Paying for its Past Mistakes
In recent years, AMD and Nvidia have seen strong market share gains, at Intel’s expense. This has been most severe in terms of CPU market share. Since 2019, Intel has gone from having 76.8% of the CPU market, to just over 60%.
The reason? Manufacturing hiccups, which in turn has resulted in product delays. As mentioned above, its new leadership is working to move on from these past issues, and make up for lost time.
For now, investors will still punish the stock for its past mistakes. Worse yet, as analyst Christopher Danley of Citi put in a research note published last month, the company could face continued challenges in the short-term.
However, investors shouldn’t take this to mean the best move is to avoid INTC stock. Heavily discounted, these issues are more than accounted for at today’s share price. If it manages to improve its results? Investors could respond by pushing the stock to substantially higher prices.
Why it May be All Uphill From Here
Again, the Intel comeback will take more than a quarter or two to play out. That’s the case when it comes to resolving issues with its supply chain, via new outsourcing deals with Taiwan Semiconductor Manufacturing (TSM), as well as the $20 billion it’s investing into its U.S. foundry operations.
It’s also the case when it comes to releasing new CPU and GPU chips to compete with AMD and Nvidia. In short, it won’t be until at least 2022 that its turnaround starts to bear fruit. Share performance could remain underwhelming for the months ahead.
Nevertheless, buying INTC stock now, ahead of the situation continuing to improve, could be a worthwhile move. Why? Again, with shares priced for disappointment, downside risk may be minimal. It could make a trip back to its 52-week low ($43.61). Yet that pales in comparison to the possible upside if its turnaround efforts pay off.
To what extent is the upside potential? If the company’s efforts prove effective, it could be able to hit the top end of analyst estimates for 2022 ($59.18 per share).
In turn, the market could also reward it by giving shares a much higher forward valuation multiple. A move to a forward P/E in the high-teens, from the 13x it’s at today, could enable the stock to make its way to between $90 and $100 per share.
What Analysts are Saying About INTC Stock
According to TipRanks, INTC stock has a consensus rating of Hold. Out of 25 analyst ratings, 9 rate it a Buy, 9 analysts rate it a Hold, and 7 analysts rate it a Sell.
As for price targets, the average Intel price target is $61.29 per share, implying around 14.54% in upside from today’s prices. Analyst price targets range from a low of $40 per share, to a high of $85 per share.
Bottom Line: Intel could be a Buy
Admittedly, it’s still questionable whether a new CEO at the helm will change the story for Intel. Even if it does, it may take time, as the stock continues to flounder.
However, if investors can be patient, it may pay to take advantage of its low valuation, and buy INTC stock. The wait may be worth it. Not only that, there’s a decent dividend to collect along the way.
Disclosure: At the time of publication, Thomas Niel did not have a position in any of the securities mentioned in this article.
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