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Intel’s Battered Bulls Find Hopes Dashed Again After Huawei Ban

Ryan Vlastelica

9 May 2024 at 1:45 pm·5-min read

(Bloomberg) -- Intel Corp bulls just cannot catch a break in 2024.

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After a 90% rally in its shares last year, the chipmaker hit another snag in its years-long effort to turn around its operations as it said a US ban on chip exports to Huawei Technologies Co. would pressure revenue. The statement, which knocked the stock to its weakest close in almost a year, was the latest in a seemingly endless drumbeat of bad news, testing the patience of those who hope Chief Executive Officer Pat Gelsinger can deliver on his vision.

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Gelsinger’s efforts to turn Intel into a foundry — a company that sells outsourced chip production to outside customers — is proving an uphill slog for the firm. A torrid stock rally in 2023 on the back of those turnaround hopes has turned into a 40% slump this year, as investors come to grips with how expensive the strategy will be and how long it may take.

Shares were up 0.3% on Thursday.

The question shareholders might be asking: why punt on a costly and risky turnaround at Intel when rival Nvidia Corp. is already cashing in booming demand for the chips used in artificial intelligence computing?

“There’s no reason to own it in the short-term, since short-term investors have to deal with capex outlays, issues with the foundry business, and a lack of meaningful data-center growth,” said Daniel Newman, chief executive officer of The Futurum Group. “Intel is playing the long game, and I admire the steadfastness, but it needs to do a lot right over time. If you’re going to own it, your horizon needs to be at least three to five years.”

This week’s bad news on chip exports followed a 30% share-price tumble in April, Intel’s biggest one-month selloff in more than 20 years. It was triggered initially by the company posting a disappointing outlook for factory operations, then a weak forecast. Its free cash flow in the most recent fiscal year was a negative $14.3 billion and is seen improving only marginally this year to negative $10.4 billion.

The April selloff put its performance toward the bottom of the Philadelphia Stock Exchange Semiconductor Index this year, with only Wolfspeed Inc. faring worse. The industry benchmark has gained 14%, largely due to an 80% surge in Nvidia, which has delivered a steady steam of blowout reports and forecasts.

Hendi Susanto, a portfolio manager at Gabelli Funds, said he would support Intel re-cutting or even suspending its dividend to shore up its financial picture. “I’m skeptical on the free cash flow picture for the next several years, and skeptical about its foundry business, where execution is really key for the stock,” he said.

Meanwhile, analysts’ estimates reflect mounting concern over Intel’s prospects. The consensus estimate for its net earnings has dropped almost 33% over the past month, while the view for revenue is down 2.5%. Fewer than 25% of the analysts tracked by Bloomberg recommend buying the stock, while the consensus recommendation — a ratio of buy, hold, and sell ratings — stands at just 3.33 out of five.

Among components of the chipmaker index, only Texas Instruments Inc. has a lower consensus.

And even Intel bulls are having a rethink. Ben Reitzes, an analyst at Melius Research still has a buy rating on the stock, as he reckons the firm will eventually benefits from AI inferencing

But “the narrative since January continues to be disappointing,” Reitzes wrote. “The hits keep coming.”

What’s more, the decline in estimates means that even after selloff, the stock continues to screen as expensive relative to its own history. Intel trades at 21 times estimated earnings, above its 10-year average of 15. While Nvidia’s multiple is higher, at 34 times, it is expected to grow revenue nearly 86% this year, compared with 3.7% at Intel.

Still, Bokeh Capital Partners chief investment officer Kim Forrest continues to be an optimist, arguing that Intel is “setting an appropriately low bar for itself.”

“I don’t know that it can’t go lower, but I know over time it should go higher, let’s put it that way,” she said.

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Sony Music Entertainment is preparing a bid against private equity funds Blackstone Inc. and KKR & Co. to acquire Japanese e-comics provider Infocom Corp. in a deal estimated to be worth around ¥200 billion ($1.3 billion).
WhatsApp has begun working freely and consistently for some users in China despite a longstanding government ban on the messaging service, an unusual phenomenon for a country with some of the world’s strictest internet curbs.

Earnings Due Thursday

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--With assistance from Carmen Reinicke.

(Updates share move in fourth paragraph.)

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©2024 Bloomberg L.P.

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