Intel has been on fire lately. In the past six months alone, the company’s stock price has rocketed 203%, reaching $123.10 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Intel, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Intel Will Underperform?
We’re happy investors have made money, but we're cautious about Intel. Here are three reasons why INTC doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Intel struggled to consistently generate demand over the last five years as its sales dropped at a 5.9% annual rate. This wasn’t a great result and signals it’s a low quality business. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Intel, its EPS declined by 35.9% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
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 19.7 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 5.8%.
Final Judgment
We cheer for all companies solving complex technology issues, but in the case of Intel, we’ll be cheering from the sidelines. Following the recent surge, the stock trades at 113.8× forward P/E (or $123.10 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at one of our top digital advertising picks.
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