Intel Stock Downgraded: What You Need to Know

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Intel (NASDAQ: INTC) shareholders -- like most investors -- had a bad day yesterday. Unlike most investors, there was a specific cause for Intel's pain.

While the big news yesterday concerned the almost-but-not-quite inversion of the yield curve, and how that might or might not signal a recession in our near future (hurting all stocks), in Intel's case the more specific bad news was that analysts at Northland Capital decided to downgrade Intel stock to underperform.

Northland's decision was based on its view of the broader international economy -- but that wasn't the whole reason for the downgrade. Here's what you need to know.

A plethora of perils

With a new $42 price target that sits 12% below where Intel trades today, and an underperform rating (Wall Street-speak for "sell"), it's clear Northland isn't impressed with the company's prospects.

Why not? Northland finds a lot of reasons to dislike Intel stock, and it laid them all out yesterday in a note covered on (subscription required). Broadly speaking, Northland worries that the company will suffer "[t]rade trauma" from the ongoing trade war between the U.S. and China. At first, fears of higher tariffs on semiconductor chips had chipmakers rushing to buy up supply, boosting Intel's sales. Recent suggestions that China and the Trump administration might work out their differences, however, could allay these, and convince chip consumers that they no longer need to buy so many chips, so quickly -- which would result in weaker sales for Intel.

Of course, it's hard to say right now which way this trade war will actually go, and when (or if) trade tensions might resolve. But this just brings us to the more specific concern Northland has over Intel: the rising threat from Advanced Micro Devices (NASDAQ: AMD).

Will AMD make Intel RIP?

Intel and AMD have been rivals in the computer chip market for decades, with Intel generally coming out on top. Lately, however, AMD has been making inroads into Intel's markets in semiconductor chips for desktop PCs, for laptops, and for servers, too.

To combat these market share losses, Intel has been working to ramp up production of more advanced 10-nanometer chips. Unfortunately, the company has encountered continual delays in mass production of these chips, and is now not expected to achieve production at scale before sometime next year. Meanwhile, AMD is already working on more advanced 7-nanometer chips, which it hopes to bring to production next year, leapfrogging Intel's technology.

Northland's worry is that Intel might not succeed in getting 10-nanometer chip production running full scale at all in 2019, thus allowing AMD to beat it to market -- and with better technology, to boot.

From worse to worst case

What would this mean for Intel? Northland's operating thesis going into this latest downgrade was that Intel would surprise its skeptics by selling more chips and producing "revenue numbers ... above consensus" in 2019 -- albeit at weaker gross margins and with potentially worse-than-expected earnings.

If Intel can't get 10-nanometer production rolling as soon as it hopes to, however, and if chip buyers start cutting back on their orders in response to lessened tariff worries, then this could deal a double whammy to Intel's revenue stream. Accordingly, Northland now believes that Intel will be forced to accept lower margins to compete with AMD and also suffer weaker revenue in 2019 -- potentially causing earnings to come in below consensus.

What it means to investors

Speaking of which, most analysts who follow Intel stock are currently predicting the company will earn $4.37 per share in 2019 -- down 3% year over year despite Intel growing sales next year.

That's already pretty bad news for Intel shareholders. Northland, however, set its price target on Intel stock at $42 a share, saying this number represents a valuation of "10x our CY 19 estimate." And this implies that Intel will earn even less than other analysts forecast -- juts $4.20 per share, or 7% less profit than the company will earn this year (and twice the decline forecast by other analysts).

If Northland turns out to be right about those earnings, it may well be right about selling Intel stock, too.

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