Intel (INTC) stock spiked late last week after a bullish rating came from Morgan Stanley for the first time in six years. Overall, the stock has gained nearly 14% year-to-date. Though perhaps this is more noise than substance, a strong start to the year is much needed for the semiconductor giant following a poor showing in 2018, amid US-China trade tension, increased competition from the likes of Advanced Micro Devices, as well as other negative macro trends.
However, even with the strong start, Northland analyst Gus Richard reiterates his Underperform rating on INTC, with a $38 price target, which implies about 30% downside from current levels. (To watch Richard’s track record, click here).
Richard says that Intel’s challenges are tied to its inability to transition from IDM to foundry. Unlike the foundry model — which outsources manufacturing to a third party — Intel and other IDM-model companies do everything in-house — including design, manufacturing and sales. Richard believes this is the wrong way to go. For example, the analyst points out, “Moore’s second law says that the cost of a semiconductor fab doubles every four years. The implication is increasing capital-intensivity drives the need for manufacturing scale. Thus, in our view, the foundry model wins and leading edge logic IDM falls behind.”
In addition to a challenge in its business model, Richard points to Intel losing market share as a point of concern. He says, “Intel’s x86 unit market share peaked in 2016 at 96%…[and] declined to 89% in CY18. We expect that AMD will continue to take share in CY19 and CY20. We also believe Apple will start to transition to an internally designed processor in its PC product line in 2020 reducing the x86 unit tam by roughly 10%.” Furthermore, Richard argues that “the Chinese have worked to eliminate non-domestically controlled sources of silicon in critical infrastructure” since 2014, after the Snowden revelations.
Notwithstanding shrinking market share and a questionable model, Intel still faces many production challenges on its 10nm processor. The company pushed volume production of the new processor to the second half of 2019. While this in itself is a major problem for the company (which continues to sell a 14nm chip), rival AMD is set to launch its 7nm chip in 2019, which will bridge the gap even further between the incumbent and fast-rising star.
Though many debate where Intel is heading in the short and long-term, Wall Street, in general, is optimistic on the stock. TipRanks analysis of 27 analyst ratings shows a consensus Moderate Buy rating, with 12 analysts rating Buy, 11 saying Hold and four Sell. However, the average price target among these analysts stand at $53.43, which is only $0.20 higher than its current value. (For more insights on INTC, get a free research report)