Buy the Dip or Bail? Morgan Stanley Weighs In

Intel (INTC) investors are having a bad week — and it may get worse before it gets better.

Heading into this week, things were already looking grim for Intel. After reporting a 1% slide in sales for Q1 in April, Intel proceeded to guide investors towards lower-than-predicted revenues and earnings in Q2 as well. Then on Monday, Citigroup analyst Christopher Danely chopped his firm’s price target on Intel by 10%, to $45 a share, citing likely weakened demand for semiconductors in this year’s second half.

And then there was yesterday’s news. In a late-breaking report from Reuters Wednesday, a leaked Intel internal memorandum described plans to pause hiring in Intel’s PC semiconductors group. Although the memorandum in question also assured Intel staff that “we are at the beginning of a long-term growth cycle across the semiconductor industry and we have the right strategy in place,” if Intel is suspending hiring in its biggest division by revenues, that’s certainly not optimistic. Furthermore, Reuters says Intel is canceling employee travel requests within the group, and limiting participation in industry conferences as well — severe belt tightening that doesn’t jibe with Intel coasting atop a “growth cycle.”

Commenting on all of this “news flow” surrounding the company, Morgan Stanley analyst Joseph Moore described his firm’s view that Intel is experiencing “challenging current business conditions.” Citing comments overheard from Intel’s CFO at a conference Wednesday, Moore reports that Intel’s sales are being impacted by weak demand where customers need a “match set” of multiple chips in order to complete manufacture of a given final product. When unable to obtain all the needed parts, such a customer might decide to delay production entirely until it can get its supply chain in order.

Additionally, Intel’s finance chief has worries about inventory levels among the company’s customers. Customers may be paring inventory levels in general — perhaps in anticipation of supply chains improving, so there will be less need to hoard chips to ensure needed supply. On the one hand, that’s a positive sign pointing to wounded global supply chains starting to heal. On the other hand, though, in the near term it may mean fewer sales for Intel s customers work down their inventories.

Story continues

“And then there was … China,” deadpanned the CFO. As you’ve probably heard, China has for the past couple of months imposed severe limits on movement in an effort to control the spread of Covid. While these restrictions have been lifting in recent weeks, “it takes time to get back to normal,” noted the CFO. And until normal returns, Intel’s sales may take a hit.

Overall, “in all three cases, the circumstances at this point are much worse than what we had anticipated coming into the [second] quarter,” concluded the CFO.

And given that Intel is describing a situation no better than, and quite possible worse than what it described just “a few weeks ago,” Moore is maintaining Morgan Stanley’s Underweight (i.e. Sell) rating on Intel stock.(To watch Moore’s track record, click here)

According to TipRanks, the consensus on Wall Street is that Intel stock is a “hold” for investors. But TipRanks might as well have said “buy” — because analysts, on average, think the stock, currently at $40.91, could zoom ahead to $51.12 within a year, delivering 25% profits to new investors. (See INTC stock forecast on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.