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Intel Stock Is Rallying Today: Are Its Troubles Over?

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Chip maker Intel (INTC) stock rose in the premarket session today. At 9:26 AM ET, it was up 1.86% on expectations of a trade war truce. On Wednesday, US and Chinese officials said that they’d hold trade talks in early October. The trade deal hopes not only triggered Intel’s rise but also pushed up other semiconductor stocks. Micron (MU) rose over 4% yesterday on expectations of a trade truce.

Intel stock also rose 4.13% yesterday and closed at $48.92. The broader market indexes gained after the news. The Dow Jones gained 237.45 points, or 0.91%, while the S&P 500 and the Nasdaq Composite rose over 1% on Wednesday. The market gains came as investors’ concerns eased after Hong Kong leader Carrie Lam decided to withdraw her controversial extradition bill. In the United Kingdom, lawmakers also agreed to push Brexit beyond October, which was seen as a positive.

The gains came after a significant sell-off on Tuesday triggered by US manufacturing PMI data, which signaled a contraction. On September 1, both the US and China levied tariffs on each other’s imported goods, which further added to the broader market decline. The US will also impose a 15% tariff on Chinese products such as laptops and cellphones on December 15 if the trade war remains unresolved. Any further duties will severely dent chip stocks.

Impact of the trade war

Intel has been bearing the brunt of the escalating trade war because of its substantial exposure to China. Its stock has tumbled since May after seeing highs in April. In May, the trade war escalated when President Trump imposed a trade ban on Huawei. The ban not only hurt Intel but also affected all semiconductor stocks. Huawei is a crucial customer for chip companies. Reportedly, Qualcomm (QCOM), Micron, and Intel generated $11 billion in total revenue from selling components to Huawei alone in 2018.

China is a significant market for semiconductor players. Companies such as Intel, Micron, Qualcomm, and Broadcom (AVGO) generate a substantial portion of their revenues from China. Intel made around 26.6% of its revenue from China in 2018. Qualcomm, Micron, and Broadcom generated more than half of their revenues from China in the year. Therefore, semiconductor stocks are likely hoping for a trade truce.

Investors are expecting the Fed’s decision on interest rates and the US jobs report this month. Reports indicate the potential for further monetary easing. However, Intel is currently grappling with several challenges, and it could take some time to recover. Let’s take a look at what’s denting its business.

Intel’s competition with AMD

Intel, which dominated the data center processor market for years, now seems to be lagging behind its peers. Last year, Intel started facing supply issues related to its 10 nm (nanometer) processor chips. The three-year delay in its 10 nm processor production not only took away its revenue but also dented its share in the PC processor market. During the second quarter, Intel’s revenue fell 3% YoY (year-over-year), primarily due to the delay in its transition to 10 nm products. Intel expects sales of $18 billion in the third quarter of 2019, down 6.0% YoY. The company also expects sales of $69.5 billion in 2019, down 2.0% YoY.

Intel is facing stiff competition from Advanced Micro Devices (AMD) in the CPU space. AMD launched its 7 nm EPYC Rome server processor, which had an edge over Intel, in early August. Intel has plans to launch its Cooper Lake Xeon processors in the first half of 2020. The company started shipping its 10 nm Ice Lake CPUs for laptops in the second quarter. It’s set to release its 10 nm Ice Lake data center CPUs in late 2020. Both AMD and Intel are making innovations and accelerating their technology transitions for higher CPU market shares. However, it seems like Intel could take years to return to its PC CPU dominance.

Intel versus NVIDIA

Intel also competes with NVIDIA (NVDA) in the AI space. However, both Intel and NVIDIA are currently struggling with their data center businesses. Data center demand has slowed recently. Some large hyperscalers started absorbing excess purchases made in the earlier quarters of 2018 amid US-China trade war fears.

Intel’s data center revenue fell 10% YoY in the second quarter and 6% YoY in the first quarter. NVIDIA’s data center revenue fell 14% YoY but improved 3% sequentially in the second quarter.

Intel seems optimistic about its data center segment. In May, it said that it expects its data-centric businesses to grow in the high single digits over the next three years. However, this growth could be offset by sluggish growth in the PC business.

Intel also quits the smartphone modem business

In July, Intel agreed to sell its 5G smartphone modem business to Apple (AAPL). It sold the business for $1 billion, as the segment wasn’t providing it with meaningful returns. However, Intel retained some of its business to build 4G and 5G modems for PCs and Internet-of-Things devices. The Intel-Apple deal is expected to close before the end of 2019.

Analysts’ recommendations

Overall, analysts favor “holds” on Intel. Among the 42 analysts covering the stock, 12 give it “buys,” 21 give it “holds,” and nine give it “sells.” Currently, Intel analysts have a 12-month target price of $53.13 on the stock. On September 4, the stock was trading at a discount of 7.9% to analysts’ 12-month target price. Its median target price was $53.50 as of the same date.

On a YTD (year-to-date) basis, Intel stock has gained only about 6.3%. The stock has underperformed not only the broader markets but also its peers due to various challenges. Peers AMD, NVIDIA, Micron, and Qualcomm have returned around 68%, 27%, 48%, and 38%, respectively, this year. The S&P 500 has risen over 17%, while the VanEck Vectors Semiconductor ETF (SMH) has gained about 33% YTD.

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