Courtesy of Ernesto Felix
- BofA analysts reiterated their “underperform” rating and $62 price target for Intel on Friday.
- Intel turned in earnings results on Thursday and BofA analysts weren’t impressed by the lack of sales growth and falling margins.
- BofA says investors would be better off buying shares of Intel rival Advanced Micro Devices.
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Bank of America gave three reasons for investors to be bearish about Intel despite the addition of Pat Gelsinger as CEO and a $20 billion move into the semiconductor production business on Friday.
In a note to clients, analysts led by Vivek Arya reiterated their “underperform” rating and $62 price target on shares of Intel.
The analysts said that the Santa Clara, California-based company has been hurt by rising competition from Advanced Micro Devices (AMD) and others. The team expects “muted” earnings growth over the next three years.
Arya and his team highlighted three specific reasons investors might want to consider alternatives to Intel shares moving forward.
Lack of sales growth
The first reason BofA believes Intel could struggle moving forward is that the firm was unable to grow sales in “a year when PC units and cloud Capex are growing 14-15%.”
Intel reported revenues of $19.7 billion for the first quarter of 2021, a 0.7% drop year-over-year, in Pat Gelsinger’s first earnings report as CEO on Thursday.
BofA’s analysts said that much of the quarterly drop in revenues was due to rising competition from AMD as well as a move to “insourcing” from Apple and Amazon.
Falling gross margins
Intel’s gross margins fell to 55.2% in the first quarter of 2021 compared to 60.6% in the same quarter last year. According to BofA’s analysts, that’s the lowest the firm’s margins have been since 2009.
Arya and his team said that they believe gross margins in the second half of 2021 will be even lower as well, at 55%-55.5%, due to rising depreciation expenses and incremental structural headwinds.
A potentially unprofitable move into semiconductor production
Finally, BofA said that Intel’s move into the foundry business (semiconductor production) is likely to be an expensive and unprofitable transition.
The foundry business is known for having lower margins, and BofA says the company’s limited experience and potential conflicts of interest could lead to poor results.
Intel has also been forced to lower buybacks in order to build infrastructure for its future foundry volumes, creating another headwind to EPS.
The BofA analysts concluded by saying they prefer Intel’s competitor AMD for investors in the coming years.
“We continue to prefer Buy-rated Advanced Micro Devices, which should grow 37% this year and can capitalize on INTC’s process technology missteps and foundry distraction, especially as AMD continues to gain customer share with its own consistent execution and solid pipeline,” the BofA team wrote.