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1 Green Flag for Intel in 2022, and 1 Red Flag

Motley Fool - Mon Jan 17, 5:25AM CST

Intel's (NASDAQ: INTC) latest turnaround efforts have caught Wall Street's attention, as the fallen chip giant is showing signs that it could deliver on its promise of regaining lost market share from rivals that have pulled ahead on the technology front in recent years.

Northland Capital markets upgraded shares of the semiconductor giant in the first week of January 2022 to outperform with a price target of $62, which implies an 11% upside from the stock's closing price on Jan. 12. Northland analyst Gus Richard cited Intel's coherent strategy and execution as the reason for upgrading the stock.

Wall Street's newfound confidence in Intel stock isn't too surprising, as the chipmaker has laid out an aggressive long-term plan to get back in the game. Could this be the year when the plan starts to bear fruit? Let's investigate one green and one red flag.

Two people working with integrated circuit boards.

Image source: Getty Images.

Intel's turnaround could gather momentum in 2022

Intel has been giving investors reasons to cheer over the past couple of months as its new line of Alder Lake processors is reportedly doing well in independent benchmarks, giving rival Advanced Micro Devices(NASDAQ: AMD) a run for its money. Intel's Core i9-12900HK laptop processor has been reported to deliver desktop-class performance and outperform AMD's Ryzen Threadripper 1950X.

What's more, the 12th-generation Alder Lake processors have helped Intel regain the gaming crown from AMD, according to independent benchmarks, with Chipzilla's offerings coming out on top of AMD's chips in terms of price-to-performance. For instance, the Core i9-12900K that's priced at $589 matches up to the performance offered by the $799 Ryzen 9 5950X.

Not surprisingly, AMD has been forced to reduce the price of its chips after Intel's latest offerings hit the market. More importantly, Intel is expected to push the envelope further as the year progresses with its Raptor Lake chips expected to hit the market in the second half of 2022. The Raptor Lake processors will reportedly pack more efficiency into its cores, ideally leading to improved power efficiency and performance.

Intel's new processors are gaining favor among customers and boosting the company's market share. This could set the stage for Intel to start getting back at AMD in 2022. It is worth noting that Intel had managed to hold on to a 60% share of the central processing unit (CPU) market in 2021 in each of the four quarters, according to third-party estimates. That was a big improvement from 2020 when the company finished the year with 61.5% of the CPU market after starting the year with a 68.4% share.

Potential market share gains in CPUs could be a green flag for Intel this year and give the company's client computing group (CCG) a shot in the arm. The CCG is Intel's biggest business in terms of revenue and accounted for 53% of its top line in the third quarter of 2021, but sales were also down 2% year over year during the period. An improvement in this area could go a long way in boosting confidence in Chipzilla stock and accelerating its turnaround.

The red flag investors should be wary of

Sales of personal computers (PCs) are expected to slow down in 2022 after two years of rapid growth spurred by the coronavirus pandemic. According to market research firm IDC, PC sales increased an estimated 13.5% last year, but they could decline nearly 5% in 2022. PC sales are expected to drop in 2023 as well, with growth expected to return only in 2024.

This potential weakness in the PC market could spoil Intel's turnaround, as it will have to compete with AMD for a smaller pool of processor sales compared to the past two years. However, there are expectations that the commercial demand for computers will continue to remain strong in 2022 and drive the PC market's growth. Additionally, the return of lockdowns across the globe to curb the spread of the omicron variant could give the PC market a boost as consumers could turn toward their computers for work, education, and entertainment like they have in the last two years.

Moreover, the PC market is expected to return to growth in the long run, clocking a compound annual growth rate of 3.3% through 2025. So, the market share gains Intel makes this year and beyond should help drive its growth.

Investors should consider looking past the potential near-term weakness in the PC market, which seems like a red flag for Intel right now. The tech giant seems on the road to redemption, which could act as a catalyst for the stock. As such, investors looking to buy a cheap tech stock right now should keep Intel on their watch lists. It is trading at just 10.6 times trailing earnings, and market share gains against AMD could drive growth in its biggest business and its stock price.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns and recommends Advanced Micro Devices and Intel. The Motley Fool recommends the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. The Motley Fool has a disclosure policy.