Will Intel Stock Recover To Pre-Inflation Shock Highs?

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INTC: Intel logo
INTC
Intel

Intel stock (NASDAQ:INTC) currently trades at $36 per share, about 47% below the levels seen on April 9, 2021 (pre-inflation shock high). Intel saw its stock trading at around $37 at the end of June 2022, just before the Fed started increasing rates, and has lost about 4% since. In comparison, the S&P 500 gained close to 15% during this period. Intel has seen demand pull back as the PC market has declined meaningfully after seeing a big demand surge through Covid-19. Moreover, the increasing prominence of graphics processors also appears to be threatening Intel as these chips – which are seen as core to artificial intelligence-related workloads – could make the CPU’s Intel sells less prominent in the AI era. That said, Intel stock has recovered by about 44% from a low of $25 seen on October 11, 2022. 

Interestingly, INTC stock has a Sharpe Ratio of 0.1 since early 2017, lower than 0.5 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Now, returning to the pre-inflation shock level would mean that Intel stock will have to gain about 89% from here. However, we estimate Intel’s valuation to be around $35 per share, roughly in line with the current market price, due to a risk of headwinds from an uncertain macro environment and mounting competition from the likes of AMD in the server processor market that the company currently dominates. That said, Intel could see an upside from its upcoming data center chips and its cost-cutting plans, which could see the company cut expenses by $3 billion in 2023 and up to $10 billion by the end of 2025. Over Q2, the company reported net income of about $1.5 billion, beating expectations.

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Our detailed analysis of Intel’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

  • 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
  • Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
  • April 2021: Inflation rates cross 4% and increase rapidly
  • Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
  • June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
  • July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
  • October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
  • Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, although another rate hike remains in the cards.

In contrast, here’s how Intel’s stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Intel and S&P 500 Performance During 2007-08 Crisis

Intel stock declined from a little over $26 in September 2007 to just $12 as of March 2009 (as the markets bottomed out), implying INTC stock lost nearly 52% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $20.40 in early 2010, rising roughly 60% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Intel Fundamentals Over Recent Years

Intel’s revenues rose from around $72 billion in 2019 to about $79 billion in 2021 led by surging demand for computing products through the early phase of the Covid-19 pandemic. However, sales declined considerably over 2022 to about $64 billion, as demand, particularly for the company’s client computing group, cooled off with PC sales moderating post-Covid-19 lockdowns. Intel’s net income also declined from around $4.77 per share in 2019 to under $2 in 2022 due to the decline in sales.

Does Intel Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Intel’s total debt has increased from $29 billion in 2019 to $49 billion now, while its total cash stood at $24 billion. It also garnered about $15 billion in cash flows from operations in 2022. The company’s financial position is reasonably healthy, and it appears to be in a good position to meet its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Intel stock has the potential for good gains once fears of a potential recession are allayed. That said, fears of a potential recession and concerns about competition could weigh on the company’s returns in the near term.

 Returns Oct 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 INTC Return 1% 36% -1%
 S&P 500 Return 1% 13% 94%
 Trefis Reinforced Value Portfolio 0% 23% 529%

[1] Month-to-date and year-to-date as of 10/9/2023
[2] Cumulative total returns since the end of 2016

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