Intel has been treading water for the past six months, holding steady at $22.65.
Is now the time to buy Intel, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
We're swiping left on Intel for now. Here are three reasons why you should be careful with INTC and a stock we'd rather own.
Why Do We Think Intel Will Underperform?
Inventor of the x86 processor that powered decades of technological innovation in PCs, data centers, and numerous other markets, Intel (NASDAQ:INTC) is a leading manufacturer of computer processors and graphics chips.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Intel’s demand was weak and its revenue declined by 5.9% per year. This was below our standards and is a sign of poor business quality. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Shrinking Operating Margin
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Analyzing the trend in its profitability, Intel’s operating margin decreased by 52.4 percentage points over the last five years. Intel’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 22%.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Intel’s margin dropped by 31.3 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because it’s already burning cash. If the longer-term trend returns, it could signal it’s in the middle of a big investment cycle. Intel’s free cash flow margin for the trailing 12 months was negative 4.2%.
Final Judgment
We see the value of companies furthering technological innovation, but in the case of Intel, we’re out. That said, the stock currently trades at 25.5× forward price-to-earnings (or $22.65 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of Intel
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