Intel’s (NASDAQ:INTC) unexpected guidance update sent the stock lower again. This bad news comes after a weak quarterly report that led to the stock falling from 52-week highs to the $45 range. Why is Intel’s three-year outlook so poor?
Intel guided float PC sales, double-digit data center chip sales, and operating margin at 32%. Though AMD’s (NASDAQ:AMD) EPYC sales will continue to cut into Intel’s server chip sales, the deceleration in Intel’s enterprise business might happen next. For now, investors need to concern themselves with falling profitability as 10nm manufacturing ramps up.
AMD does not face the same cost issues with its 7nm manufacturing. For now, Intel still has an advantage of an established enterprise customer base and resources available for marketing.
Trading Plan
Even though medium term prospects for Intel are troubling, speculators could bet on Intel stock falling in the $40 - $46 range. If chip stocks recovered and brought Intel stock back to the $50 - $55 range investors could sell. Selling calls to trade the recent stock volatility would lower the average cost basis.
From a valuation perspective, Intel discounted the slowdown ahead with a P/E and forward P/E in the 10 times range.
Takeaway
Intel’s cost disadvantage is a concern for the next three years. If gross margin starts dropping at a faster rate, consider a shorter holding period for shares.
