Intel (INTC) Limps Into Key Earnings Report

Dow component Intel Corporation (INTC) reports third quarter 2020 earnings this week after stumbling in July, beating second quarter estimates but lowering guidance due to delays in the rollout of the company's 7nm-based CPUs. The stock fell 16% after the news, battered by shareholder disappointment and at least seven Wall Street downgrades. The decline stretched within three points of March's nine-month low before bouncing in August, but the uptick into October has failed to fill the downside gap.

Key Takeaways

  • Intel handed a competitive advantage to rivals when it delayed the rollout of the next chip generation.
  • Accumulation readings have dropped to four-year lows, signaling the departure of institutional capital.
  • Wall Street is highly bearish on Intel's long-term outlook.

The misstep cost Intel a major time advantage against competitive products from Advanced Micro Devices, Inc. (AMD) and NVIDIA Corporation (NVDA), underpinning strong rallies in both issues after the news. More importantly, the delay for Intel has further eroded already bearish investor sentiment and generated a potential paradigm shift that could translate into years of lost market share and sub-par stock performance.

The $228 billion old-school tech giant has been plagued by years of weak management and questionable business decisions, allowing smaller rivals to scoop up market share that may now be lost permanently. The shift out of personal computers and into handheld devices in the last decade has taken a major toll as well, with Intel stock now trading at the same price level it first reached more than 20 years ago.

Jefferies drilled another nail in the coffin in August, calling Intel's delay "systemic," referencing the management team's inability to compete in the modern technology environment. Intel has bought back shares at an accelerated pace to support the stock price, but the strategy could backfire, as evidenced by International Business Machines Corporation (IBM), which is stuck in a seven-year downtrend despite similar buyback strategies.

Wall Street consensus on Intel stock is close to rock-bottom for a big tech icon, with a "Hold" rating based upon 8 "Buy," 14 "Hold," and a stomach-churning 9 "Sell" recommendations. Price targets currently range from a low of $45 to a Street-high $75, while the stock ended Friday's session right at the median $55 target. Consensus earnings per share (EPS) of $1.11 is a penny above July guidance, adding pressure on the company to post upbeat results on Thursday.

A stock buyback, also known as a share repurchase, occurs when a company buys back its shares from the marketplace with its accumulated cash. A stock buyback is a way for a company to re-invest in itself. The repurchased shares are absorbed by the company, and the number of outstanding shares on the market is reduced. Because there are fewer shares on the market, the relative ownership stake of each investor increases.

Intel Daily Chart (2013 – 2020)

Intel stock is still trading below the August 2000 all-time high at $75.81, unlike the majority of the tech universe, which cleared similar resistance years ago. The stock returned to the January 2002 swing high in the lower $30s in 2014 and broke out, but the rally made little headway, stalling near $38 at year end. That marked resistance for the next three years, ahead of a 2017 breakout that fizzled out in the upper $50s in the second quarter of 2018.

Price action since that time has carved a shallow but volatile pattern that has tested support in the $40s four times in the past two years. Two higher highs during this period have run into a buzz-saw of selling pressure, with repeated failures further eroding long-term buying interest. Even so, the 200-week exponential moving average (EMA) has risen about 10 points in two and a half years, showing weak but incremental share appreciation, underpinned by a dividend yield that now stands at 2.44%.

Intel Short-Term Outlook

The on-balance volume (OBV) accumulation-distribution indicator continues to fall despite the slow-motion uptick and is now sitting at a four-year low. This confirms an aggressive exodus by institutions, at the same time that massive capital is pouring into tech start-ups and new superstars. Given this volume headwind, it will be hard for Intel to avoid the bearish fates suffered by IBM, Cisco Systems, Inc. (CSCO), and other old tech behemoths.

Accumulation/distribution is a cumulative indicator that uses volume and price to assess whether a stock is being accumulated or distributed. The accumulation/distribution measure seeks to identify divergences between the stock price and volume flow. This provides insight into how strong a trend is.

The Bottom Line

Intel has bounced since delaying the rollout of the next chip generation, but the lost competitive advantage could undermine performance and market share for years to come.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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