Intel (NASDAQ: INTC) the new plan may unravel before it gets off the ground. One of the main reasons behind CEO Pat Gelsinger’s new direction of chip manufacturing was the bullish sentiment of similar stocks. to TSMC (TSM). We know that TSMC is laser focused on chip manufacturing and Intel would need to hugely increase its investments to compete with TSMC. There are many uncertainties and roadblocks that Intel faces that may limit any improvement in equity returns over the next few years.
Intel, TSMC and Samsung have announced plans to invest billions of dollars to increase chip manufacturing capacity and move to next-generation technology. However, there is certainly a risk of overproduction due to intense competition. Intel would need a couple of home runs to catch up with TSMC, and there’s still a high likelihood that Intel will show poor growth metrics over the next few years. Intel announced a whopping $ 28 billion capex in 2022, but TSMC is already beating that scale by announcing over $ 40 billion in capex this year.
This can make the title a value trap and test the patience of the company’s hardest believers. In the current phase of the turnaround, it is better to wait and watch management’s next moves instead of jumping to take some low-priced shares.
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 a company’s top executives are chasing profits or revenue growth. This is not entirely true. The top executives of most companies are looking to improve the trajectory of the shares. If Wall Street is rewarding another competitor for its strategy, management will try to replicate that strategy. This can backfire because the new strategy may not benefit a company’s core business.
We can see a number of examples of this approach. Apple (AAPL) is looking to build a streaming business that will cost more than $ 100 billion over the next decade. Entry into this business was likely due to the massive rating awarded to Netflix (NFLX) prior to the pandemic. But the recent Netflix stock correction shows the limits of a streaming activity. Apple will also face competition from Amazon (AMZN), Disney (DIS), Netflix and others that will limit the growth of subscriptions in the streaming industry.
Intel’s change in seismic strategy in 2021 may also be due to rapid valuation growth at TSMC. In the 12 months leading up to the announcement of chip production by Intel’s new CEO, TSMC had nearly quadrupled its share price. This could have been a great incentive for Intel’s management to pursue a stronger chip manufacturing strategy.
Figure 1: Movement in Intel and TSMC stock prices before Intel’s strategy change in 2021.
Review the new strategy
It’s been over a year since Intel’s new CEO announced that “Intel is back. Old Intel is now the new Intel.” The future trajectory of Intel’s shares now depends on the success or failure of this strategy and therefore it is important to look at the new trends in this sector. There have been supply chain issues over the past year and both Intel and TSMC have announced huge investment plans in the US, Europe and Asia.
Figure 2: Poor revenue growth has again shaken investor confidence.
Intel has again announced results that have shaken investor confidence, leading to another stock correction. There was also a reduction in revenue forecasts for the full year. Wall Street has not been kind to companies with very low revenue growth rates. Intel’s management has already announced that the next few quarters will be particularly challenging with massive capital expenditures. At the same time, the revenue growth rate would be low single-digit. We should take this prediction as an upper limit. If Intel were to lag further behind in chip development, headwinds to revenue growth would increase. Intel has already announced investments of tens of billions of dollars to build new factories. Hence, a course correction would be impossible in the next few years.
No half measures
Intel shares are very cheap, which has increased its appeal to some valuable investors. However, investors should fully support Intel’s new moves. We could see a roller coaster ride for Intel stock in the coming quarters as the company launches new products and makes progress towards setting up new factories. There are a number of challenges faced by Intel that can derail any stock momentum. One of the biggest is the growing competition. While Intel has announced billions of dollars in investments for the US 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 increased its capital expenditures and plans to spend from $ 40 billion to $ 44 billion in 2022. While Intel is looking to achieve the parity in chip size, it may never be able to come close to TSMC’s spending power. This will be a major obstacle for Intel as TSMC may continue to expand its manufacturing market share. Higher spending by TSMC could also hurt Intel’s margins in the future.
Impact on the share price
The biggest question facing investors is whether Intel stock is a value investment or a value trap. There are a number of hurdles that management will have to overcome in order to achieve its production capacity target. Even if these goals are met, there is a strong possibility that TSMC will continue to improve its technology and manufacturing advantage 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 for revenue growth at Intel is low single-digit in the near term. If the current roadmap is successful, Intel may be able to achieve double-digit revenue growth in 2025 according to management. On the other hand, TSMC has already predicted 35% growth in 2022 and a strong growth track in the coming years.
Figure 3: Comparison of revenue growth, capex and PE forward ratio between Intel and TSMC.
TSMC’s revenue estimates show that the company will reach a revenue rate of $ 100 billion by 2024. The future capital expenditure rate is also likely to increase in line with revenue growth. This will make it difficult for Intel to catch up with TSMC in the production race despite having received a lead from the CHIPS Act and subsidies in Europe. We can also see that Intel shares are not very attractive in terms of the PE forward ratio. According to this metric, the company is trading above TSMC’s valuation metric despite having a huge difference in revenue and investment trajectories.
Intel’s new management grand plan faces enormous challenges due to competitive pressure. Although the title has a final XP ratio of less than 7, it can still be a great value trap. Intel’s total stock returns are likely to be lower than those of the broader market over the next few years, making it a poor bet.
Takeaway for investors
More than a year ago, Intel announced a huge strategy change with an increased focus on manufacturing. This strategy could have been promoted due to TSMC’s rapid growth before 2021. However, it will be a tall order for Intel to bridge the gap with TSMC in terms of manufacturing. Despite announcing a massive increase in investment and the potential for grants, Intel is still far behind TSMC’s capital spending budget. The revenue growth of TSMC and Intel is on a completely different trajectory. With the current growth trend, TSMC is expected to reach a revenue rate of $ 100 billion in 2024, which will allow the company to further increase its capital spending plans.
Wall Street rarely rewards stocks in companies that exhibit poor revenue growth. Intel has already announced low single-digit revenue growth estimates for the next few quarters. This alone will reduce any bullish moment in the stock. The stock itself is not cheap if we look at the PE forward multiple and there could be further margin squeeze as competition intensifies. Investors looking for a value stock should look to other potential candidates rather than Intel stock.