Intel stock (NASDAQ: INTC) is up almost 20% since the beginning of 2021, and at the current price of near $59 per share, we believe that Intel stock has around 15% potential downside.
Why is that? Our belief stems from the fact that Intel stock is up around 1.3x from the low seen in March 2020. Further, after posting weak Q1 ’21 numbers, it’s clear that demand for Intel’s products has not recovered to levels before the pandemic. Our dashboard What Factors Drove 26% Change In Intel Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.
Intel stock’s rise since late 2018 came due to a 10% rise in revenues, from $71 billion in 2018 to $78 billion in 2020. Net income margins dropped from 29.7% to 26.8% over the same period, as a result of rising costs. This, combined with a roughly 9% drop in the outstanding share count, led to EPS rising by 9%, from $4.57 to $4.98 over this period.
Intel’s P/E (price-to-earnings) ratio dropped from 10.3x in 2018 to 10x by 2020 end, but has risen to 12x currently, riding the rally in technology stocks. However, given Intel’s weak Q1 2021 results, there is possible downside risk for Intel’s multiple.
So what’s the likely trigger and timing to this downside?
The global spread of coronavirus and the resulting lockdowns in early 2020 saw a drop in demand for semiconductors worldwide, and Intel was also impacted by this. Further, with Intel’s announcement about the delay in next generation chipsets, and Apple’s decision to switch to their in-house M1 chips for their new Macbooks, demand for Intel’s products has taken a bigger hit. This is evident from Intel’s results for Q1 2021, where revenue came in at $19.67 billion, down from $19.83 billion for the same period last year. Further, rising COGS and operating expenses saw operating income drop almost 50% to $3.7 billion. This led to EPS dropping from $1.33 to $0.83.
Further, if there isn’t evidence of worldwide containment of the virus anytime soon, demand for the company’s products will remain stagnant in the near to medium term, and if the company is not able to control expenses, we believe the stock will see its P/E multiple decline from the current level of 12x to around 10x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $50, a downside of 15% from the current price of $59.
While Intel stock does not seem attractive currently, 2020 has created many pricing discontinuities which can offer further trading opportunities. For example, you’ll be surprised how the stock valuation for Activision Blizzard vs. D.R. Horton shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.