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Late Friday, S&P Dow Jones Indices announced that Nvidia (NVDA) will replace Intel (INTC) in its benchmark Dow Jones Industrial Average ($DOWI). The announcement was hardly a surprise, and neither is the price action, with INTC shares trading 1.5% lower in the premarket today. But should you sell Intel stock as it is kicked out of the 30-share price-weighted index?
To begin with, Intel’s position in the Dow had started getting untenable. It's no longer the chip industry bellwether it was in 1999 when it was added to the index. In fact, Intel is among those dot com-era stocks that have never revisited the highs that they hit during that period.
Specifically, Intel hit an all-time high of $75.81 per share on Aug. 23, 2000, and currently trades at less than a third of that price level.
Why Did the Dow Replace Intel with Nvidia?
The falling stock price also means that Intel is the cheapest Dow Jones constituent, based on its share price, and therefore had the lowest weighting in the Dow. Nvidia’s inclusion (and Intel’s removal) will help keep the Dow more current, and as S&P Dow Jones Indices aptly said in its release, “ensure a more representative exposure to the semiconductors industry.”
Earlier this year, Amazon (AMZN) was added to the Dow, replacing Walgreens Boots Alliance (WBA) after a long stretch of underperformance by the drugstore chain. Back then, we had noted that it was perhaps time that Nvidia replaced Intel for precisely the same rationale that the S&P Dow Jones Indices provided for Amazon.
INTC Stock Falls After Getting Kicked Out of Dow
Removal from benchmark indices like the Dow is almost invariably perceived as a negative for a stock – at least, in the short term. Getting kicked out of any index means that the passive funds and ETFs tracking that index will have to necessarily sell the stock, which puts pressure on the share price. It also negatively impacts sentiment, as even some retail investors who otherwise don’t “have to” sell the stock from their portfolios, like index funds, also join the selling trend.
Intel Reported Better-Than-Expected Q3 Earnings
The announcement of Intel's exit from the Dow Jones came shortly after the chip manufacturer reported fiscal Q3 earnings that were better than feared. While Intel’s Q3 revenues fell 6% YoY to $13.28 billion, they easily surpassed the $13.02 billion that analysts were expecting.
Management expects revenues in the current fiscal quarter to range between $13.3 billion and $14.3 billion, with the midpoint above Street estimates. Intel expects to post adjusted earnings per share of 12 cents in the fiscal fourth quarter, after posting a loss in the fiscal third quarter.
However, the company withdrew guidance for its Gaudi 3 artificial intelligence (AI) chip hitting $500 million in revenues this year. Intel CEO Pat Gelsinger said that “overall uptake of Gaudi has been slower than we anticipated as adoption rates were impacted by the product transition from Gaudi 2 to Gaudi 3 and software ease of use.”
INTC Stock Forecast
UBS sees Intel's better-than-expected guidance as “reasonably constructive,” even as the brokerage said that it arrived amid tepid expectations. The firm also sees “slow progress” from Intel on the goals that the company has outlined, and maintained its “Neutral” rating on the stock.
JPMorgan, however, was not convinced by the Q3 report, and maintained its “Underweight” rating on Intel, citing the company’s falling gross margins and weaker sales of Gaudi AI chips, among other factors.
Overall, Wall Street sentiment toward Intel remains somber, with 30 of the 36 analysts actively covering the stock rating it as a “Hold” or some equivalent. Two analysts rate INTC as a “Strong Buy” and 1 as a “Moderate Buy,” while the remaining 3 analysts advise selling INTC.
Is Intel Stock a Buy?
I believe Intel has put the worst behind it, and while the company’s outlook – at least for the near term – is not exactly looking sunny and bright, it's also not as bad as some fear. The company is working on multiple fronts, developing new products as well as structurally cutting down on costs, which should show results in the long term.
During the Q3 earnings call, Intel said that the launch of its 18A production process is on the “horizon.” which will help it bring back some chip production in-house. Given the cost-efficient nature of 18A, it will lead to higher profitability for the company.
Intel has also partnered with Amazon to produce an AI fabric chip for the e-commerce giant’s enterprise-focused Amazon Web Services (AWS). Previously, it also signed up Microsoft (MSFT) as a customer for its foundry segment.
Intel has big plans for its foundry business, and expects the segment to rake in external revenues of $15 billion by the end of this decade. It looks to become the second-largest foundry globally by 2030, and expects the business to post operating margins of 30%.
These numbers might sound a bit fairytale-like for now, given where that business currently stands, but Intel said that it will periodically provide metrics like the lifetime deal value of external foundry customers to better gauge the segment's performance.
Overall, Intel remains a turnaround play as Gelsinger tries his hand at the company’s most aggressive restructuring in decades. In terms of valuation, INTC trades at a next 12-month (NTM) price-to-sales multiple of 1.83x - which is higher than the August low of 1.51x, but still considerably below the stock’s historical averages.
As for INTC being kicked out of the Dow, while it is certainly a short-term negative, I won't be selling shares on the news. On the contrary, in the unlikely event of Intel stock seeing a massive sell-off, I would consider adding more shares of this cheap turnaround play.
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