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The Intel Problem

Written by Briton Ryle
Posted March 24, 2021

I feel a little out of touch. I guess that’s not totally surprising here in the COVID age. Speaking of COVID, my son just got his first dose of vaccine apparently because he has a retail job that he works for six hours on Saturdays.

My daughter got her first last week. She’s at school in New Orleans, where smoking cigarettes puts you in the “at-risk” group. She doesn’t smoke either, except for when the clinic nurses are looking...

Me? I’m 55, and my group doesn’t become eligible here in Maryland until April 27. Another month. I understand vaccine programs in some states are now completely open to anyone that wants a jab.  

I know our Governor Larry Hogan has aspirations for higher office, largely due to his handling of the pandemic. But I gotta say, my confidence is waning pretty fast. 

Anyway, COVID isn’t really why I’m feeling out of touch today. It’s actually Intel’s (NASDAQ: INTC) fault.

I haven’t spoken at a conference, taken questions, or even just rubbed shoulders with investors in over a year, so I’ve lost track of why investors seem to think that Intel is a good investment these days.

We Got Rules See 

If we ignore the internet bubble highs, Intel’s highs are a bit over $68 a share. Actually, it’s four bits over — $68.47.

And those highs came after the company gave up on mobile and 5G chips and completely screwed up its attempts to shrink its chips down to 7 nanometers. 

Chips getting smaller, that’s the very essence of Moore’s Law. Now, ole Gordo was one of Intel’s founders, so you might consider Moore’s Law to be something of a founding principle at Intel. And you might also consider Intel’s inability to follow the rules a good example of irony. 

However, the big irony, at least to me, is that Intel still seems to be considered a good, long-term investment. Some stocks just seem to get labeled “safe” or “reliable,” and investors just stop doing the research that established the safety and reliability of a company in the first place.

It’s like what happened with GE, which was a mainstay for two generations. It was an original Dow Industrials stock and a huge innovator — MRIs, jet engines, the X-ray, television; GE even had an electric car in 1968. 

Nobody wants to admit it, but Jack Welch ruined GE when he moved it into financial services. It was great while those GE-backed credit cards drove profit growth for the Welch years... not so great when the GFC gutted that business and sent GE into a death spiral. 

But GE's reputation held on pretty well. I can’t tell you the number of people who've asked me if it's time to buy GE. My answer is always the same: Nope, GE is a broken company. 

I put Intel in the same category: broken company.

The Financial Reality of Intel

From 2009 to 2017, Intel traded at reasonable levels between $15 and $35. It took off in 2017 and has since traded between $45 and $65. 

Why the ramp job? I’d say it was the cloud and data centers. Investors really “got” the cloud story around 2017, and Intel’s +95% market share of data center chips was part and parcel of the cloud story. 

But just like Welch did at GE, Intel was selling out its history of innovation to rely on one go-go aspect of its business. 

I sometimes marvel that AMD eating into Intel’s market share, and Amazon’s move to use its data center chips at AWS, hasn’t really dented the Intel rep.

I marvel, but I also know why.

Vanguard owns $16.8 billion worth of Intel shares. They are sitting in your index funds. 

BlackRock owns $15 billion worth.

In all, 3,500 institutions own 66% of Intel. How do you get out of that position without causing the stock to crash? The answer is: slowly and carefully.

Nobody’s gonna yell "sell" in a crowded trade, so consider this a heads up on Intel.

I don’t know what the final straw will be for Intel and its investors, but it’s coming. And to quote one of GE's first big television hits, "One of these days, Alice... bang... zoom," but it won't be the moon the share price heads to... kinda the opposite.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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