A “Blood in the Streets” buying opportunity.

Intel’s comeback story… Wall Street’s myopic fallacy… why Eric Fry and Thomas Yeung remain bullish… The road to AGI is almost here

Intel’s price chart is the stuff of investment nightmares…

Source: StockCharts.com

Since its peak in 2021, the chip maker has lost 68% of its market value.

However, a savvy investor might see this collapse quite differently…

A chance to buy one of the AI ​​leaders of tomorrow at a very low price, left for dead.

Today, let’s look at Intel with the help of Thomas Yeung, who is Eric Fry’s lead analyst in the Investment report. Both Thomas and Eric remain very bullish on Intel despite the price carnage.

Let’s understand why, then use it as a springboard to discuss Eric’s interpretation of Artificial General Intelligence (AGI), which we focused on here in Digest recent.

There’s a lot more going on with Intel than the headlines would lead you to believe

In April, MarketWatch pulled no punches with an article titled “Intel’s Bad Year Gets Worse, Analyst Denounces Company as ‘Deeply Broken.’

The article quotes an analyst at research shop Berstein who said:

While we believe they are doing everything in their power to try to fix things, it is clear that the company is deeply damaged and it will take years to see the fruits of their labor (currently exhaustive), with success in their efforts far from assured amid execution difficulties and structural headwinds.

Now, on the one hand, this is true…

Intel’s comeback is not a quick fix. And if you’re looking for an opportunity to double your money by, say, next month, Intel is unlikely to be your stock. He is paying the price for the wrong steps of the past years and the correct course will take time.

But for investors with more patience and the ability to see the big picture, what is sacrificed in the short term has the potential to be made up many times over in the long term.

To begin to understand why, let’s go to Thomas:

In 2023, Intel allocated $16 billion in research and development. The company makes its own chips and has even gained market share in PC-based GPUs, the graphics processing units for which Nvidia is known. Analysts expect its research and development budget to rise another 2 percent to $16.3 billion this year.

To put this in perspective, Intel’s R&D budget is larger than that of Nvidia ($8.6 billion) and Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) ($5.8 billion) combined.

Now, a skeptic might reply, “Who cares? Intel is so late to the party that this R&D spending will only get them to the starting line of the race. But by the time they catch up, other chipmakers will be even further along. Meanwhile, Intel’s earnings are atrocious.”

Well, yes and no.

Understanding what Intel is trying to achieve

The skeptics are right about one thing – Intel’s recent earnings have been rough.

They are the reason why Intel’s price suffered the most recent decline in the chart above.

But that collapse reflects Wall Street’s obsession with short-term performance, not long-term potential.

Back to Thomas for more on Intel’s earnings and what Wall Street is missing:

On Aug. 2, Intel announced a terrible set of second-quarter earnings that sent shares tumbling 30% over the next few days. Revenues were down 1%, while adjusted gross margins fell an alarming 6.4 percentage points from 45.1% to just 38.7%. Analysts at Morningstar called it “a horror.”

These financial results directly reflect the strategic decisions made by Intel management.

During the quarter, the company moved significant portions of its production from its low-cost, low-volume plant in Oregon to a high-cost, high-volume facility in Ireland.

Intel believes its Meteor Lake AI processor will be a hit with PC customers, and by moving to Ireland, it has preemptively positioned itself to deliver much higher volumes.

Thomas goes on to explain that moves like this are part of Intel’s attempt to “outpace” the competition. It plans to ignore the 5-nanometer (5nm) semiconductor standard and instead focus on developing 4nm, 3nm and 20A chips.

So no – Intel isn’t trying to catch up with where other chipmakers are today, it’s watching where technology will be tomorrow.

Thomas concludes that “the biggest risk taker in AI today is not Nvidia or even TSMC. It’s Intel – a company that’s finally playing AI as an all-or-nothing game.”

Using market pessimism to your advantage

Billionaire Rob Arnott, founder and chairman of the research board Affiliated, is credited with one of my favorite investment quotes:

In investing, what is comfortable is rarely profitable.

Intel is not a “comfortable” investment today. On the other hand, buying a stock like Nvidia would be very comfortable. After all, even though its price has dropped, who could blame you for buying this king of AI chips?

Be that as it may, Eric suggests that Intel will surpass Nvidia regarding the future. And part of his reasoning is this difference in sentiment and expectations for the two companies.

Let’s go to Eric in his August issue Investment report:

Relying on popular opinion is toxic because it tends to be based on linear projections. Yesterday’s trends are expected to become tomorrow’s trends…

Clearly, popular opinion favors Nvidia over Intel. But I would take the other side of the trade. Over the next few years, I expect Intel’s unpopular stock to outperform Nvidia’s wildly popular stock.

Nvidia’s high-flying stock anticipates Hall of Fame results, while Intel’s depressed stock anticipates endless disappointment. It reflects a company that will continue to bench at the minor league level for a long time.

Herein lies today’s investment opportunity. Even modest signs of improvement at Intel could propel the stock to much higher levels.

A quick look at the valuation helps make it clear why just a hint of good news could boost Intel’s stock price (and outpace Nvidia)…

Today, Nvidia trades at about 75 times its cash flow, and its price-to-book ratio is 55.

Meanwhile, Thomas reports that Intel is trading at just 11.5 times this year’s cash flow and 0.74 times book value — its lowest point ever and one of the few times it’s ever traded below book value.

Interested but still not convinced?

Great – consider a small starting position. You don’t have to enter.

But going up today when sentiment (and price) is so depressed, you avoid what most investors will do, which is captured by the meme below…

Source: Brandon Beylo

Bottom line: Intel has warts, no doubt about it. But for AI investors willing to accept the risk, this is a major opportunity that requires very serious consideration.

Keep your eyes out for Road to AGI

In recent months, Eric has turned his attention to AGI (which is part of the reason he’s so bullish on Intel).

According to his research, it is coming faster than most people realize, will change life as we know it, and mark a point of no return for the synthesis of technology and humanity.

Here, in Digestwe started a series focused on AGI in anticipation of the release of Eric’s study. The latest news I have is that Eric is putting the finishing touches on a summary of his findings called Road to AGI.

We could have more news on its release time as soon as tomorrow, certainly by next week. Regardless of when it arrives, this is something I encourage you to look into if you want to get ahead of AI from an investment angle.

As we profiled in Digest recently, AGI presents a high risk from a technological and sociological perspective, but also an incredible opportunity from an investment point of view. In either case, a better understanding of what’s on the road will help us position ourselves wisely.

So stay tuned for more from Eric on Road to AGI in the next few days. In the meantime, check out Intel. If Eric and Thomas are right, this beat-up, former blue-chip tech has long-term homerun potential.

As Thomas writes, “Although Intel is coming from behind, Eric believes the company has fallen too far…and that its big bets will pay off.”

good evening

Jeff Remsburg