Intel Promises Return to Chip Dominance. Does Anyone Care?

Intel (INTC) stock has been lagging the broader market for more than 20 years, hurt by the rise of nimble competitors, manufacturing delays and the fact that the world's largest semiconductor company missed out on some of the biggest changes in technology of the past couple of decades.

But Intel, a component of the Dow Jones Industrial Average, insists that it's set to turn all that around. The company on Monday affirmed that it remains on target to regain leadership in semiconductor manufacturing.

A multi-year effort to return to the forefront of production technology will allow the firm to reverse market-share losses to competitors such as Advanced Micro Devices (AMD) and Nvidia (NVDA), Intel says. And if that weren't bold enough, Intel even has designs on competing with Taiwan Semiconductor Manufacturing (TSM) in the market for manufacturing chips for other semiconductor companies.

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TSM, incidentally, recently became one of Warren Buffett's top stock picks.

Intel is indeed the world's largest chipmaker, with commanding market shares in central processing units for personal computers (PCs) and data center servers. But its business, as we have been reminded many times over the years, is a slowly melting iceberg. PCs, after all, are in secular decline.

True, data centers are an area of growth in a future increasingly powered by artificial intelligence, but investor interest has shifted to firms that make chips for mobile devices and the Internet of Things. In these endeavors, Intel is an also-ran.

In other words, Intel's current strategy is critical to the stock's long-term success. Bulls contend that if the company is able to deliver on its aspirations, it could provide the catalyst INTC stock needs to shake off its multi-decade run of underwhelming returns.

With that as our backdrop, it's probably at least somewhat disheartening to INTC bulls that Wall Street remains very much on the sidelines on Intel stock. As illustrious and widely held as Intel stock may be, it's a "show me" story at best, analysts say.

Past performance, as we all know too well, is not indicative of future returns, but one look at Intel stock's long-term chart is reason enough to be skeptical about the firm's promises. The chipmaker has tried to reverse its fortunes many times before, and yet INTC stock's track record shows only that investors would have been better served putting their capital elsewhere.

Over the past three years, INTC stock delivered an annualized total return (price plus dividends) of -17.2%. The S&P 500, meanwhile, delivered a three-year annualized total return of 10.4%. At five years, INTC stock's annualized total return stands at -5.1% vs. 10.7% for the broader market. 

Things get better when we look back farther, but not by much. Intel stock generated positive annualized total returns over the past 10, 15 and 20 years – but still lagged the broader market by at least 5 percentage points in every one of those periods.

Little wonder, then, that not only does the Street's consensus recommendation on INTC stock stand at Hold, but it's been stuck there for a very long time.

Of the 43 analysts issuing opinions on Intel stock tracked by S&P Global Market Intelligence, seven rate it at Strong Buy, two say Buy, 24 have it at Hold, five call it a Sell and five rate it at Strong Sell. Moreover, Intel stock has held a rating no better than Hold since early 2019.

In other words, analysts as a group haven't been constructive on the name for years. Sadly for bulls, Intel's current strategy hardly has them changing their minds.

Oppenheimer analyst Rick Schafer, who rates shares at Perform (the equivalent of Hold) does a good job summing up Wall Street's lack of enthusiasm for INTC stock.

"Intel remains largely tied to PC growth, and our relatively bearish stance reflects our belief that the PC market has begun a secular decline," Schafer writes in a note to clients. "Intel has stumbled on its technology leadership, falling behind peers as they struggled to transition to 10 nanometer manufacturing."

Susquehanna Financial Group takes an even dimmer view of Intel stock's prospects. Analyst Christopher Rolland, who rates shares at Negative (the equivalent of Sell) downgraded INTC earlier this year from Neutral (Hold). He cites a slew of headwinds, including increased competition in servers and PCs – notably from Apple (AAPL) – as well as a "work-from-home hangover" that's depressing sales of Windows devices. 

Rolland further worries about longer-term pressures on Intel as it "moves to more complex, multi-packaged and smaller geometries, and as increased competition pressures pricing."

Intel stock trades at just 14.7 times analysts' 2023 earnings per share (EPS) estimate. That's cheaper than the broader market. But then the Street forecasts Intel's EPS to decline at an average annual pace of more than 11% over the next three to five years.

It's hard to make a bull case on valuation based on that sort of earnings forecast. Most analysts don't even try to. 

Warren Buffett has said that the problem with most turnarounds is that they don't turn. Berkshire Hathaway (BRK.B), of which Buffett serves as chairman and CEO, actually owned Intel a decade ago. The stake underperformed and he dumped it in fairly short order.

Something tells us Warren Buffett won't be biting on Intel stock amid the chipmaker's current turnaround efforts either.