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.
Semiconductors are so important that they can even create national security issues when drones, fighter jets, and other critical military components are affected.
That’s one of the reasons why President Biden met with 20 top executives on Monday to discuss what can be done to fix the chip industry’s supply constraints and make sure something like this doesn’t happen again in the future.
President Biden has committed to helping the industry fix the semiconductor shortage with his new infrastructure bill. The $2 trillion infrastructure and jobs package will include some $50 billion for semiconductor research and production.
Still, despite help from the US government, experts say the global chip shortage is set to drag on. Below, Insider details how long four experts expect the crisis to continue and what it could mean for markets.
In an interview with Insider on April 6, Baird’s Ted Mortonson said he believes the global chip shortage will continue through the rest of the year.
The tech sector strategist said rising demand from the cloud sector, the 5G rollout, telecommunications firms, EV makers, and more is one of the main reasons for the shortage and noted that new capacity will need to come online to offset demand.
Mortonson highlighted semiconductor firms’ recent investments into capacity including Taiwan Semiconductor Manufacturing Co.’s $100 billion investment over the next three years that the company says will “increase capacity to support the manufacturing and R&D of advanced semiconductor technologies.”
However, the strategist said that despite new initiatives, much of the additional capacity won’t come online until the end of the year. Mortonson also noted that most semi companies have instituted “non-cancellable orders” and that lead times range from 15 weeks to over 50 weeks in some cases.
Mark Fields, former Ford CEO and senior advisor at TPG Capital
Mark Fields sat down with CNBC on April 9 to discuss the effects of the global chip shortage on the auto industry. Fields said auto manufacturers lost about 3 million units due to COVID in 2020 and he expects the chip shortage may be just as destructive.
“Through the first quarter, through various forecasts, it looks like about 700,000 units were lost…you can just do the simple math and you could see that the losses could approach the level of the Covid losses for last year,” the advisor said.
Fields also said automakers are trying to maximize their production value by focusing on selling their highest margin vehicles, but that it’s really a “game of whack-a-mole” given the breadth of supply constraints.
Fields added that the situation for automakers should get better in the second half of 2021, but the industry won’t fully recover until well into 2022.
Ganesh Moorthy, chief executive officer at Microchip Technology
Ganesh Moorthy, the CEO of Microchip Technology, spoke with CNBC on Monday about the chip shortage and said it’s the worst crisis he’s seen in the industry in 40 years.
The “imbalance between supply and demand has never been this acute in all my history in this industry,” the CEO said.
Moorthy also said that he believes supply constraints will last through the year and “most likely” continue into next year.
The CEO added that the chip shortage has been “brewing for some time” and said that it started with tariffs during 2018 which caused demand to fall. In response, Moorthy says many chip manufacturers leaned out inventory and idled some factories in response.
Then when the pandemic hit, a swath of new stay-at-home trends caused demand to skyrocket, leading to the shortage.
Moorthy said that it “takes six months of cycle time from when we say go to when production comes online full force,” so he expects the lack of supply to continue moving forward.
Anand Srinivasan, Bloomberg Intelligence analyst
Anand Srinivasan, an analyst with Bloomberg Intelligence, spoke with Yahoo Finance on Monday and said that the chip shortage could persist well into the second half of 2021.
The analyst said investors shouldn’t just be worried about their auto industry holdings due to the semiconductor shortage either.
“In the grand scheme of a $440 billion industry the auto business is only 8%, 9% of semiconductors,” the analyst said.
Srinivasan is “more worried about other areas where the impact could be larger and it affects a lot more people.”
He said a variety of products will be affected by the shortage but argued the two industries he’s most worried about are PCs and smartphones, which make up some 70% of semiconductor demand.
The good news for investors is that Srinivasan believes that the lack of supply will stretch out demand, rather than hurting it. “You’re not going to go out and buy a bicycle because you couldn’t get your Audi A4,” the analyst said.
This means that although production might be hurt in the short-term, over the long haul strong demand will remain, according to the analyst.
The news sent shares of Nvidia surging by as much as 4% on Tuesday, while both Intel and AMD fell by about 4%. Nvidia has historically manufactured premium GPU processors, also known as video cards, with its target customer being PC gamers.
“The result of more than 10,000 engineering years of work, the NVIDIA Grace CPU is designed to address the computing requirements for the world’s most advanced applications, including natural language processing, recommender systems and AI supercomputing,” Nvidia said.
Shares of Qualcomm fell as much as 8% Thursday after the company announced sales that were slightly lower than analysts’ estimates for its fiscal first quarter.
Qualcomm, the world’s largest smartphone chipmaker, reported sales that were up by 63% to $8.24 billion year-on-year. Adjusted revenue was slightly lower than consensus at $8.23 billion versus the expected $8.27 billion. Adjusted earnings grew 199% to $2.17 per share versus Wall Street’s estimate of $2.10
If not for a worldwide semiconductor shortage, newly appointed company president Christian Amon said revenue would have been higher.
The demand for chips that run computers and cars, among other devices, cannot be met by some suppliers in Asia. Amon however said the company is expecting “this to normalize toward the later part of 2021 as capacity is put in place.”
Still, both revenue and earnings showed strong growth year-on-year due in large part to the electronics boom brought about by the pandemic when most of the global economy shut down, forcing people to stay at home.
The San Diego, California-based company added that it is targeting $7.2 billion to $8 billion in sales in the current quarter – higher than Wall Street estimates.
Last month, Qualcomm announced that Amon will succeed Steve Mollenkopf after seven years as CEO.