Intel's $32 billion share rally sends valuation to dot-com era levels
Shares of the struggling chipmaker have rallied 28 per cent in August, adding about US$25 billion (S$32 billion) in market value, on reports that the US government is in talks for a potential equity stake, as well as plans for a US$2 billion investment from Japan's SoftBank Group. The jump has Intel trading at 53 times profits projected over the next 12 months, the highest since early 2002, according to data compiled by Bloomberg.
'The stock looks incredibly expensive here,' said Wayne Kaufman, chief market analyst at Phoenix Financial Services. 'That kind of multiple is a bet that the government will push Intel so hard on customers that it becomes a winner.'
The surge in Intel in Aigust followed a slump in the wake of a disappointing earnings report on July 24 and criticism of its chief executive officer Tan Lip-Bu earlier by US President Donald Trump, who called for him to step down, citing conflicts of interest. After meeting with the CEO on Aug 11, Mr Trump changed his tune, saying Mr Tan's 'success and rise is an amazing story.'
Since then, reports have circulated that the Trump administration is in discussions to take a stake of about 10 per cent in the company. US Commerce Secretary Howard Lutnick said in a CNBC interview on Aug 19 that the talks are aimed at converting US grants already made to Intel under the Chips and Science Act into non-voting equity.
Of course, the US's plans regarding Intel haven't been finalised and could still change. Intel didn't respond to a request for comment.
For Paul Nolte, market strategist and senior wealth manager at Murphy & Sylvest Wealth Management, the potential government involvement could benefit Intel in the short-term but may pose a risk in the long term.
'This strikes me as an easy road to get onto, but a hard one to get out of,' Mr Nolte said. 'At the end of the day, this raises so many more questions than it answers.'
Meanwhile, Intel's premium valuation is largely a reflection of just how much its profitability has collapsed in recent years.
Intel is projected to generate more than US$1 billion in adjusted profit over the next four quarters, after losing about US$1.3 billion in the previous four, according to data compiled by Bloomberg. From 2018 to 2021 the company generated more than US$20 billion in annual profits on average.
Still, there is optimism that Mr Tan will be able to turn things around. Much of his focus has been on cost cutting, which has improved Intel's outlook to return to profitability but raised concerns the chipmaker may be bowing out of the race for technological leadership. Part of his effort has also been centered on a costly build out of its foundry operations undertaken by his predecessor, Pat Gelsinger.
'Clearly it's going to take a number of years for it to really start operating on a smooth basis,' said Gerrit Smit, lead portfolio manager of the Stonehage Fleming Global Best Ideas Equity fund. 'We've got trust in him, but we think he's got a long slog ahead.' BLOOMBERG
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