There aren’t many investors in the same league as renowned Berkshire Hathaway CEO Warren Buffett. Since the so-called “Oracle of Omaha” took the helm of the multinational conglomerate in 1965, its stock has had an enviable average annual gain of 20%-plus and it has soared a mind-blowing 3,641,613% in total (through the end of 2021).
Piggybacking on Buffett’s holdings has proven to be a profitable strategy, with some investors poring over the required 13F filed with the Securities and Exchange Commission (SEC) every quarter. Yet those documents don’t tell the whole story. Berkshire Hathaway owns investment firm New England Asset Management, which has roughly $5.9 billion in assets under management.
One stock in Buffett’s “secret portfolio” that looks particularly intriguing right now is semiconductor maker Intel (INTC 2.81%). The bear market has mauled the stock, which is currently down 56% from its high. However, there are a number of potential catalysts that could help change its fortunes.
Can Intel overcome the challenges that have punished its stock in recent years? Let’s take a step back to see what the bigger picture reveals.
Consumers and investors alike are no doubt familiar with Intel, which made a name for itself by developing processors used in the vast majority of personal computers (PCs). In fact, Intel is the world’s largest manufacturer (by revenue) of semiconductors.
Yet in the face of the current macroeconomic headwinds, computer purchases have fallen off a cliff. In the fourth quarter, PC shipments declined 29%, while falling more than 16% for the year, according to information technology research firm Gartner. The culprits? Fears of a global recession, rampant inflation, and rising interest rates.
These factors weighed on Intel’s results. In the third quarter, revenue of $15.3 billion declined by 20% year over year, while its earnings per share (EPS) of $0.25 cratered by 85%. Given the magnitude of the decline, it’s little wonder that investors had a crisis of faith.
A little perspective
In times like these, investors can sometimes gain some much-needed perspective by taking a broader view. While the company’s results seem dismal, they should be viewed in context.
Graphics processing specialist Nvidia also suffered a reversal of fortune last year. For its fiscal 2023 third quarter (ended Oct. 30), revenue of $5.9 billion declined 17% year over year, while EPS of $0.27 slumped 72%. At the same time, rival Advanced Micro Devices (AMD 3.48%) experienced similar headwinds, citing the softening PC market and substantial inventory reductions across the PC supply chain. While its revenue held up better, growing 29% year over year to $5.6 billion, EPS of $0.04 plunged 95%.
Taken as a whole, the results point to the cyclicality of the semiconductor market and macroeconomic conditions as the cause of the recent industrywide downturn. This further suggests that when those headwinds abate, demand will bounce back, and Intel’s business will rebound as well.
It’s no secret that AMD nibbled away at Intel’s market share in recent years — but the tide may be turning. The recent release of Intel’s 13th-generation Raptor Lake central processing units (CPUs) helped the company regain some ground in its core market. In the fourth quarter, Intel gained share in both the desktop and laptop markets, according to Mercury Research. Some industry watchers expect Intel to continue recouping share, due to the performance and efficiency gains of its latest processor.
At the same time, while Intel ceded some share to AMD in the server processor market, those losses were fairly insignificant, with Intel still controlling 83% of the market. CEO Pat Gelsinger expects Intel to cede more share this year, before rebounding in 2024 and taking back market share in 2025. If its gains in the PC and laptop markets are any indication, AMD has a much bigger fight on its hands.
There’s another potential tailwind that could help drive Intel’s future growth. Late last year, the company broke ground on a $20 billion semiconductor manufacturing plant in Ohio. The catalyst for the move was the benefits afforded by last year’s CHIPS and Science Act, which provided nearly $53 billion in incentives to semiconductor manufacturers that build facilities in the U.S. This came on the heels of a $20 billion development in Arizona, as well as an expansion of Intel’s facility in New Mexico.
These moves set the stage for Intel’s ambition to become a force in the foundry business, with the goal of becoming the world’s second-largest contract chipmaker by the end of the decade. While that’s an ambitious goal, increasing its scale and leveraging its expertise would bolster the company’s margins, which in turn would boost its profits.
Greedy when others are fearful
Intel’s pivot and the current down cycle sent fair-weather investors running for the exits. As a result, there’s a lot of negativity baked into the stock price right now. On the bright side, however, Intel’s valuation is ridiculously low. It’s trading for roughly 1.8 times sales, its lowest price-to-sales ratio since late 1990. It also trades for an equally compelling 9 times earnings.
To be clear, Intel has plenty of work to do. That said, given its industry-leading position, the number of catalysts that could lift its business, and its bargain-basement price, Intel is one stock in Warren Buffett’s secret portfolio that could soar.
Danny Vena has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Berkshire Hathaway, Intel, and Nvidia. The Motley Fool recommends Gartner and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, short January 2023 $200 puts on Berkshire Hathaway, short January 2023 $265 calls on Berkshire Hathaway, and short January 2025 $45 puts on Intel. The Motley Fool has a disclosure policy.