Why Intel Took the Chip Sector Down Today

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What happened

Shares of Intel (INTC -5.28%) were trading down by 5.25% as of 2:06 p.m. ET Wednesday.

The chip stock fell following the release of a negative note from a Citibank analyst that was based on his takeaways from a semiconductor industry conference hosted by Bank of America earlier this week. Apparently, the tone of Intel’s presentation was enough to make the already-pessimistic analyst even more cautious about Intel stock, at least in the near term.

So what

On Wednesday morning, Citi analyst Christopher Danley wrote that his “bear case” scenario for Intel appeared to be taking shape. Danley already had a neutral rating on the stock, and he did not downgrade it to a sell. He also maintained his $45 price target on it. What he did, though, was reduce his revenue and earnings estimates for the company for the quarter and the year, citing the cautious tone of Chief Financial Officer David Zinsner at the conference.

In Danley’s view, Zinsner’s comments indicated that the current quarter is turning out to be more challenging than anticipated, and Intel had already given conservative guidance on its first-quarter earnings call. A big part of Intel’s business involves chips for personal computers, sales of which have weakened as people in much of the world try to put the pandemic behind them and as inflation bites into consumer discretionary purchases.

“We’re going to go through some choppiness for sure in the near term as everyone else will as well,” Zinsner said at the conference, “and you know what we’ve got to do is kind of keep our heads down and drive the business, execute to the plan and things will have a good outcome for us.”

Of course, while analysts mostly focus on the next quarter and the next 12 months, Intel is aiming for a larger and longer-term turnaround story. Under new CEO Pat Gelsinger, not only is the company ramping up efforts to catch up to its rivals on leading-edge chipmaking, but it’s also planning to become a foundry that third parties can outsource chip manufacturing to. These huge moves won’t pay off in the near term, but rather over a span of three to five years. Therefore, shareholders may have a while to wait before they can see signs of more tangible progress.

Now what

It was curious that one cautious analyst note that was specific to Intel seemed to drag down share prices across the entire semiconductor sector. While Intel used to be a bellwether for the industry, that isn’t really the case anymore.

For one thing, Intel has lost its lead in cutting-edge production. Taiwan Semiconductor Manufacturing (TSM -0.39%) surpassed it a few years ago, allowing Intel’s competitors like Advanced Micro Devices (AMD -3.21%) to leap ahead by using TSM’s foundry services. AMD has been gaining market share at Intel’s expense, so it’s a bit difficult to distinguish what is really an industrywide issue and what’s an Intel-specific issue when Intel gives a negative outlook.

Speaking of Taiwan Semi, that company actually held its annual shareholder meeting Tuesday night, and management reiterated its outlook for 30%-plus growth this year amid a tight market. Apparently, whatever is ailing Intel isn’t affecting TSM. That could either be due to TSM’s technological lead, its exposure to a broader array of chips, or both. While sales of PCs and smartphones may be soft this year, demand for high-performance computing chips and automotive chips is apparently still incredibly strong.

Either way, while Citibank’s note may be bad news for Intel, I wouldn’t necessarily extrapolate it to the rest of the industry. Therefore, Wednesday’s action may be opening up buying opportunities elsewhere in the chip sector.

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