Technology

Why Wall Street Sees Intel's Flop as a Huge Victory for 2 Top Rivals

Jon C. Ogg

Published: July 25, 2020 6:55 am

Wall Street decided to throw some of the top momentum leaders into a boxing ring after their earnings reports. Netflix, Microsoft and Tesla were some of the key losers, to name a few. There was also pressure around some of the other industry leaders, whether or not they were big momentum stocks. One big loser was Intel Corp. (NASDAQ: INTC).

Intel’s earnings report was covered in detail, but the bulls and the bears now will have a longer-term fight. Value investors and short sellers will get to decide whether Intel’s stock price sell-off was too drastic. Intel’s short interest was just 33.6 million shares as of the last view in July, and the Refinitiv consensus analyst target price of $62.72 ahead of earnings will be coming down sharply after the new price targets get included in the mix next week.

Intel’s problem was not its earnings. The semiconductor and processor giant reported quarterly revenues of $19.7 billion and adjusted earnings of $1.23 per share. Both were above FactSet’s consensus estimates of $18.5 billion in revenue and $1.11 per share. Despite the recession, the revenue compared to just $16.5 billion a year earlier.

The guidance included an impact from delays in the 7-nanometer-based CPU product timing by about six months longer than expectations, and apparently the yield of its process is trending closer to 12 months behind the company’s targets. Intel CEO Robert Swan cited a defect mode in its 7-nanometer process causing yield degradation. The company has gone to the root cause of the issue and sees no fundamental roadblocks, but it also has invested in contingency plans as a hedge against any future timing delay.

Reminders of Intel’s past issues in getting its 10-nanometer platform production out to market kept coming up in research reports. The company’s struggles allowed competitors to get a jump with better performance, and Intel’s dominant balance sheet and behemoth position were both unable to make up the difference.

It is not unusual for Wall Street analysts to issue new lower price targets after an earnings disappointment, but it is usual to see so many formal downgrades in a top stock like Intel.

• Morgan Stanley maintained its Equal Weight rating but lowered its target price to $61 from $65.
• Credit Suisse maintained its Outperform rating but lowered its price target to $70 from $75.
• BofA Securities downgraded Intel from Buy to Neutral and lowered its price objective to $62 from $70.
• Wedbush Securities maintained its Underperform rating and $51 price target, and it was positive on the opportunities that Intel just handed to two of its competitors (see below).
• Northland Capital downgraded it to Underperform from Market Perform.
• Deutsche Bank lowered its rating to Hold from Buy and cut its target from $70 to $60.
• Bernstein downgraded Intel to Underperform from Market Perform, with a new $45 price target.
• Roth Capital downgraded it to Neutral from Buy and slashed its price target to $55 from $75.
• Barclays downgraded it to Underweight from Equal Weight and lowered its target price to $48 from $58.
• CFRA maintained its Hold rating but cut its target to $52 from $60, after noting sharp PC declines ahead.

While Intel did worse on its outlook from the 7-nanometer woes, the particularly troubling aspect of the drop in the stock was that so many analysts were very positive about Intel’s valuations and long-term prospects ahead of the report. Perhaps the only good news here is that Intel’s valuation of roughly 11 times normalized earnings could help its stock hit a springboard effect, if it can resolve its issues more rapidly than expected.

One company’s woes can help create opportunities for rivals. Advanced Micro Devices Inc. (NASDAQ: AMD) was trading sharply higher as its 7-nanometer platform is already up and running. Wedbush noted that Intel’s push-out of its 7-nanometer process certainly should be a positive for AMD’s intermediate-term to longer-term prospects, but Intel’s increased optimism around its second-half market share in data center and in personal computers could indicate a near-term pause in AMD’s market share gains. AMD shares were up 16% at $69.25 late on Friday, and the stock even hit new all-time highs.

Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM) was another gainer on Intel’s woes. Its shares were up over 11% at $75.20 late on Friday, with it also seeing new all-time highs. Wedbush noted that Intel’s manufacturing struggles create opportunities for Taiwan Semi, whether from competitors taking share or Intel outsourcing the product. The firm Macquarie also upgraded it to Outperform from Neutral on the heels of the call, and Citigroup reiterated its Buy rating and noted that Taiwan Semi could see longer-term gains from outsourcing and the company could capture most (or all) of the outsourcing revenues.

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Intel shares were only up about 2% year to date going into earnings, but the stock was up more than 30% from those panic-selling lows seen in March. Any disappointment there was going to come with a price, and that’s exactly what happened.

Intel shares were down 15% at $51.25 late on Friday, and the stock had even traded more than 120 million shares (over five times normal volume) by noon. Its 52-week range is $43.63 to $69.29, and the dividend yield at the lower price was up to nearly 2.6%.