Intel’s (NASDAQ:INTC) new plan might unravel before it lifts off the ground. One of the main reasons behind the new direction of chip production undertaken by CEO Pat Gelsinger was to bullish stock sentiment similar to TSMC’s (TSM). We know that TSMC is laser-focused on chip production and Intel would need to massively increase its capex to compete with TSMC. There are a lot of uncertainties and roadblocks faced by Intel which can limit any improvement in stock returns for the next few years.
Intel, TSMC and Samsung have announced plans to invest billions of dollars to increase the chip production capacity and move to next-gen technology. However, there is certainly a risk of overproduction due to intense competition. Intel would need to hit a couple of home runs to catch up with TSMC and there is still a high chance that Intel will show poor growth metrics in the next few years. Intel announced a massive capex of $28 billion in 2022 but TSMC is already beating this scale by announcing over $40 billion capex this year.
This can make the stock a value trap and test the patience of the most avid believers in the company. At the current stage of the turnaround, it is better to wait and watch the next moves of the management instead of jumping in to get some cheap-priced stock.
Imitation is the best form of flattery
Intel has announced one of the most ambitious plans in its corporate history. It is generally believed that the top executives of a company chase profit or revenue growth. This is not entirely true. The top executives of most companies are looking to improve the stock trajectory. If Wall Street is rewarding another competitor for its strategy, then the management would be looking to replicate that strategy. This can backfire because the new strategy may not benefit the core business of a company.
We can see a number of examples of this approach. Apple (AAPL) is trying to build a streaming business that will cost it more than $100 billion over the next decade. The entry into this business was likely due to the massive valuation awarded to Netflix (NFLX) prior to the pandemic. But the recent correction in Netflix stock shows the limits of a streaming business. Apple will also face competition from Amazon (AMZNDisney (DIS), Netflix, and others which will limit its subscription growth in the streaming business.
Intel’s seismic change in strategy in 2021 could also be due to the rapid valuation growth in TSMC. In the 12 months prior to the chip production announcement by the new Intel CEO, TSMC had almost quadrupled its stock price. This could have been a big incentive for Intel’s management to pursue a stronger chip production strategy.
Figure 1: Price movement of Intel and TSMC stock prior to the strategy shift by Intel in 2021.
Look at the new strategy
It has been over a year since Intel’s new CEO announced that “Intel is back. The old Intel is now the new Intel.” The future stock trajectory of Intel is now dependent on the success or failure of this strategy and hence it is important to look at the new trends in this business. There have been supply chain issues in the last year and both Intel and TSMC have announced massive investment plans in USA, Europe, and Asia.
Figure 2: Poor revenue growth has again shaken investor confidence.
Intel has again announced results that have shaken the confidence of investors which led to another correction in the stock. There has also been a reduction in full-year revenue forecast. Wall Street has not been kind to companies that report very low revenue growth rates. Intel’s management has already announced that the next few quarters will be particularly tough with massive capital expenditure. At the same time, the revenue growth rate would be in the low single digit. We should take this forecast as an upper limit. If Intel falls further behind in chip development, the headwinds toward revenue growth would increase. Intel has already announced tens of billions of dollars in investment to build new factories. Hence, a course correction would be impossible in the next few years.
No half measures
Intel stock is very cheap which has increased its attractiveness to some value investors. However, investors would need to fully back Intel’s new moves. We might see a roller coaster ride for Intel stock in the next few quarters as the company launches new products and makes progress toward setting up new factories. There are a number of challenges faced by Intel that can derail any stock momentum. One of the biggest is growing competition. While Intel has announced billions of dollars in investment for USA and Europe, TSMC has bolder plans for its future capital investment. TSMC is laser-focused on manufacturing which gives it an edge over Intel.
Intel has announced a capital expenditure of $28 billion, however, TSMC has also ramped up its capital expenditure and is planning to spend a whopping $40 billion to $44 billion in 2022. While Intel is trying to achieve parity in terms of chip size, it might never be able to come close to TSMC’s spending capacity. This is going to be a major headwind for Intel because TSMC could continue to expand its manufacturing market share. Higher spending by TSMC might also hurt Intel’s margins in the future.
Impact on stock price
The biggest question in front of investors is whether Intel stock is a value investment or a value trap. There are a number of stumbling blocks that the management will have to overcome in order to reach its goal in terms of manufacturing capacity. Even if those goals reached, there is a strong possibility that TSMC will continue to improve its technology and manufacturing lead on the back of its massive capital expenditure. It is highly unlikely that Intel will come close to TSMC’s spending plans even by 2025.
As mentioned above, the best-case scenario of revenue growth in Intel is low single digits in the near term. If the current roadmap is successful, Intel might be able to hit double-digit revenue growth in 2025 according to the management. On the other hand, TSMC has already forecasted growth of 35% in 2022 and a strong growth runway in the next few years.
Figure 3: Comparison of revenue growth, capex, and forward PE ratio between Intel and TSMC.
The revenue estimates of TSMC show that the company will be hitting $100 billion revenue rate by 2024. It is likely that the future capital expenditure rate will also increase in line with revenue growth. This will make it difficult for Intel to catch up with TSMC in the manufacturing race despite getting a tailwind from the CHIPS Act and subsides in Europe. We can also see that Intel stock is not very attractive in terms of forward PE ratio. According to this metric, the company is trading higher than TSMC’s valuation metric despite having a massive difference in revenue and capex trajectories.
The grand plan of the new management in Intel faces massive challenges due to competitive pressure. While the stock has a trailing PE ratio of less than 7, it can still be a big value trap. The total returns of Intel stock are likely to be below that of the broader market in the next few years making it a poor bet.
Over a year ago, Intel announced a massive change in strategy with more focus on manufacturing. This strategy could have been promoted due to the rapid growth of TSMC prior to 2021. However, it will be a tall order for Intel to close the gap with TSMC in terms of manufacturing. Despite announcing a massive increase in capex and the potential to get subsides, Intel is still far behind TSMC’s capital spending budget. The revenue growth of TSMC and Intel are on a completely different trajectory. At the current growth trend, TSMC should be hitting $100 billion revenue rate in 2024 which will allow the company to further increase its capital spending plans.
Wall Street rarely rewards stocks in companies that show poor revenue growth. Intel has already announced low single-digit revenue growth estimates for the next few quarters. This alone will reduce any bullish momentum in the stock. The stock itself is not cheap when we look at the forward PE ratio multiple and there could be a further squeeze in margins as the competition heats up. Investors looking for a value stock should look at other potential candidates instead of Intel stock.