What a fantastic six months it’s been for Intel. Shares of the company have skyrocketed 92.6%, hitting $113.56. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Intel, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Intel Will Underperform?
We’re glad investors have benefited from the price increase, but we’re cautious about Intel. Here are three reasons we avoid INTC, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Intel’s demand was weak over the last five years as its sales fell at a 4.9% annual rate. This was below our standards and is a sign of poor business quality. 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 27.1% 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. Cash Burn Ignites Concerns
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.
While Intel posted positive free cash flow this quarter, the broader story hasn’t been so clean. Intel’s demanding reinvestments have drained its resources over the last two years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 7.4%, meaning it lit $7.37 of cash on fire for every $100 in revenue.
Final Judgment
Intel falls short of our quality standards. After the recent rally, the stock trades at 66.6× forward P/E (or $113.56 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
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