The turnaround story at Intel … the short-sighted bearishness from Wall Street … why Eric Fry and Thomas Yeung remain bullish … the Road to AGI is nearly here
Intel’s price chart is the stuff of investment nightmares…
Since its 2021 high, the chipmaker has lost 68% in market value.
However, a savvy investor might see this collapse quite differently…
A chance to buy one of tomorrow’s AI leaders at a rock-bottom, left-for-dead price.
Today, let’s look at Intel with the help of Thomas Yeung, who is Eric Fry’s lead analyst in Investment Report. Both Thomas and Eric remain very bullish on Intel despite the price carnage.
Let’s understand why, then use that as a springboard to discuss Eric’s take on Artificial General Intelligence (AGI), which we’ve been focusing on here in the Digest recently.
There’s far more happening with Intel than the headlines would have you believe
In April, MarketWatch pulled no punches with an article titled “Intel’s bad year worsens, with analyst decrying company as ‘profoundly broken’.”
The article referenced an analyst at the research shop Berstein who said:
While we believe they are doing everything they can to try to repair things it is clear that the company is profoundly broken, and it will take years to see the fruits of their (currently exhaustive) labor, with success in their endeavors far from assured amid execution difficulties and structural headwinds.
Now, on one hand, this is true…
Intel’s turnaround is not a quick fix. And if you’re looking for an opportunity to, say, double your money by next month, Intel is unlikely to be your stock. It’s paying the price for missteps from years past, and the course-correct will require time.
But for investors with greater patience and the ability to see the bigger picture, what’s sacrificed in the short-term has the potential to be made up for many times over in the long-term.
To begin understanding why, let’s go to Thomas:
In 2023, Intel funneled $16 billion into research and development. The company produces its own chips, and has even gained market share in PC-based GPUs, the graphics processing units Nvidia is known for. Analysts expect its R&D budget to grow another 2% to $16.3 billion this year.
To put that into perspective, Intel’s R&D budget is larger than Nvidia’s ($8.6 billion) and Taiwan Semiconductor Manufacturing Co. Ltd.’s (TSM) ($5.8 billion) combined.
Now, a skeptic might respond, “Who cares? Intel is so late to the party that this R&D spend will only get them to the starting line of the race. But by the time they catch up, the other chipmakers will be even farther ahead. Meanwhile, Intel’s earnings are atrocious.”
Well, yes and no.
Understanding what Intel is trying to accomplish
The skeptics are right about one thing – Intel’s recent earnings were rough.
They’re the reason why Intel’s price suffered its most recent knife-edge drop in the chart above.
But that collapse reflects Wall Street’s obsession with short-term performance, not long-term potential.
Let’s return to Thomas for more on Intel’s earnings and what Wall Street is missing:
On August 2, Intel announced a terrible set of second-quarter earnings that sent shares tumbling 30% over the next several days. Revenues shrank 1%, while adjusted gross margins alarmingly decreased 6.4 percentage points from 45.1% to just 38.7%. Analysts at Morningstar called it a “horror.”
These financial results are direct reflection of the strategic decisions Intel’s management is making.
During the quarter, the company shifted significant portions of its production from its low-cost, low-volume plant in Oregon to a high-cost, high-volume one in Ireland.
Intel believes its Meteor Lake AI processor will be a hit among PC customers and, through the move to Ireland, has preemptively positioned itself to deliver far greater volumes.
Thomas goes on to explain that moves such as this are part of Intel’s attempt to “leapfrog” the competition. It plans to skip the 5-nanometer (5nm) semiconductor standard and, instead, focus on developing 4nm, 3nm, and 20A chips.
So, no – Intel isn’t trying to catch up to where the other chipmakers are today, it’s aiming for where the technology will be tomorrow.
Thomas concludes that “the biggest risk-taker in AI today is not Nvidia or even TSMC. It’s Intel – a company that’s finally playing AI like an all-or-nothing game.”
Using the market’s pessimism to your advantage
Billionaire Rob Arnott, founder and chairman of the board of Research Affiliates, is credited with one of my favorite investment quotes:
In investing, what is comfortable is rarely profitable.
Intel is not a “comfortable” investment today. On the other hand, buying a stock like Nvidia would be very comfortable. After all, even if its price fell, who could blame you for buying this AI chip king?
Be that as it may, Eric suggests Intel will outperform Nvidia looking forward. And part of his rationale is this difference in sentiment and expectation for the two companies.
Let’s go to Eric in his August issue of Investment Report:
Trusting popular opinion is toxic because it tends to rely on linear projections. It expects yesterday’s trends to become tomorrow’s trends as well…
Clearly, popular opinion favors Nvidia over Intel. But I would take the other side of that trade. Over the next few years, I expect the unpopular shares of Intel to outperform the wildly popular shares of Nvidia.
Nvidia’s high-flying stock anticipates ongoing Hall of Fame results, while Intel’s depressed stock anticipates endless disappointment. It reflects a company that will continue riding the bench at the little league level for a long while.
Therein lies today’s investment opportunity. Even modest signs of improvement at Intel could propel the stock to much higher levels.
A quick look at valuation helps shed light on why just a hint of good news could boost Intel’s share price (and outperform Nvidia) …
Today, Nvidia trades at roughly 75X its cash flow, and its price-to-book ratio is 55.
Meanwhile, Thomas reports that Intel trades for just 11.5 times this year’s cash flows and 0.74 times book value – its lowest point in history, and one of the few times it’s ever traded below book value.
Interested but not yet convinced?
Great – consider taking a small starter position. You don’t have to cannonball in.
But by scaling in today when sentiment (and price) is so depressed, you avoid what most investors will do, which is captured by the meme below…
Bottom line: Intel has its warts, no doubt about it. But for AI investors willing to accept risk, this is a major opportunity that demands very serious consideration.
Keep your eyes out for the Road to AGI
In recent months, Eric has turned his attention to AGI (which is part of the reason he’s so bullish on Intel).
According to his research, it’s coming faster than most people realize, it will alter life as we know it, and it will mark a point of no return for the synthesis of technology and humanity.
Here in the Digest, we’ve begun a series focused on AGI in anticipation of the release of Eric’s study. The latest news I have is that Eric is putting the finishing touches on a summary presentation of his findings called the Road to AGI.
We could have more news on its release timing as soon as tomorrow, certainly by next week. Regardless of when it arrives, this is something I encourage you to look into if you want to get ahead of AI from an investment angle.
As we’ve been profiling in the Digest recently, AGI carries great risk from technological and sociological perspectives, but also incredible opportunity from an investment angle. In both cases, having a greater understanding of what’s on the way will help us position ourselves wisely.
So, be on the lookout for more from Eric on the Road to AGI over the next few days. In the meantime, check out Intel. If Eric and Thomas are right, this beat-up, former-tech-blue-chip has long-term homerun potential.
As Thomas writes, “Though Intel is coming from behind, Eric believes the firm has now fallen too far… and that its big bets will pay off.”
Have a good evening,
Jeff Remsburg
