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Intel (NASDAQ: INTC) was already having a tough year before reporting profits last week. When these numbers came out, the stock’s free fall went even deeper. Now, the tech company’s shares are down more than 60% since the start of the year.
The stock hasn’t traded at such low levels in more than a decade, and it’s having its worst day on the market in 50 years. Even though there is a lot of risk involved, has the stock become too cheap to pass up at its current price?
What went wrong for Intel?
Intel has invested in building up its foundry business to meet the dire need in the US for a major domestic chipmaker that the country can count on, rather than relying on foreign sources. But it hasn’t exactly been a smooth ride for the company and its shareholders.
On August 1, the company reported its results for the period ending June 29, and it was a disappointing performance at both the top and bottom levels. Intel’s revenue during the period was $12.8 billion, down 1% from the same period last year. What was even more alarming was the operating loss of almost $2 billion that the company suffered, which was almost double the loss it suffered a year ago. Intel’s restructuring and other costs rose by more than $740 million over the period, a major reason for its deteriorating operating results.
To improve its financial position, Intel is reducing its workforce by 15% and “implementing a comprehensive reduction in expenses” as it aims to cut $10 billion in costs by 2025. The company also announced that it would suspend its dividend.
Intel shares are trading at a price of a price-to-book multiple of less than 0.8, and the price/revenue ratio is also modest at 1.6. However, based on analyst estimates, the stock trades at 34 times estimated forward earnings, which is a bit high considering the average S&P500 shares trade at a multiple of 22.
Wall Street analysts have lowered their price targets on the tech stocks, but many of them are still higher than where they are trading now. The analysts’ consensus price target is almost $33, which would mean an upside of more than 66% for investors who buy the stock today. That doesn’t mean the stock is a surefire bet to generate these kinds of profits, but it does help highlight how undervalued the stock may be in the short term (analyst price targets normally look at where the stock will go within the next twelve months could go).
Intel’s shares seem cheap, but the danger is that it may ultimately be a… value trap. The company is embarking on an ambitious turnaround strategy to renew its operations and reduce costs. And without clarity on how well that will go, investors should demand a high margin of safety in this stock and therefore expect a discount.
Should you invest in Intel?
Intel stock can be a dangerous investment to keep in your portfolio. The company has a big task ahead of it to try to grow again, build a strong foundry business and do that while maintaining profits. I’m not optimistic that it can do all that smoothly, which is why I would hold off on buying Intel stock today.
The stock has the potential to be a good buy in the long term for contrarian investors with a high risk tolerance, but it does require incredible patience. Most investors are probably better off pursuing other growth stocks.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls to Intel and short August 2024 $35 calls to Intel. The Motley Fool has one disclosure policy.
Down 60% This Year, Is Intel Stock A Buy? was originally published by The Motley Fool