Intel’s 21.7% return over the past six months has outpaced the S&P 500 by 6.1%, and its stock price has climbed to $29.48 per share. This run-up might have investors contemplating their next move.
Is now the time to buy Intel, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Intel Will Underperform?
We’re glad investors have benefited from the price increase, but we're swiping left on Intel for now. Here are three reasons there are better opportunities than INTC and a 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 have short-term success, but a top-tier one grows for years. Intel’s demand was weak over the last five years as its sales fell at a 7.6% 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. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Looking at the trend in its profitability, Intel’s operating margin decreased by 49.2 percentage points over the last five years. Intel’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 22.8%.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Intel’s margin dropped by 39.4 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s in the middle of a big investment cycle. Intel’s free cash flow margin for the trailing 12 months was negative 16.8%.
Final Judgment
Intel falls short of our quality standards. With its shares outperforming the market lately, the stock trades at 94.4× forward P/E (or $29.48 per share). This valuation tells us it’s a bit of a market darling with 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.
Stocks We Would Buy Instead of Intel
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