Intel Still Has No Answer To AMD

Summary

• Intel's latest desktop chip is underwhelming; this has been the story of Intel chips in the past few years and continues to be a headwind for the company.
• With an increasing amount of bearish catalysts and few bullish ones, INTC will likely trend downward.
• The upcoming earnings report will be a reminder to investors that Intel is stagnating among peers that are flourishing.
• I recommend selling OTM weekly calls up to earnings.
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Last time we discussed Intel (NASDAQ:INTC), we looked at the CES 2021 announcements, primarily Intel’s new laptop CPUs and its outsourcing of its 7nm chip production. Again, we have new developments: performance reports on the company’s newest desktop CPU, the Rocket Lake Core i7-11700K. Here, I want to add more details to my bearish thesis on this company.

Performance Problems

The Rocket Lake Core i7-11700K is hardly much better than last year’s Comet Lake Core i7-10700K. From UserBenchmark results, we can see that overclocking just the RAM of the Comet Lake processor would produce a faster system than the Rocket Lake at only 70% the price. In addition, due to the design being a backport of the 10nm architecture on a 14nm chip, the small performance boost comes at a power cost, and this is during a time when other chip designs are outperforming Intel’s at extremely low power costs (see Apple’s M1, for example).

Intel seems focused on moving its chips forward via small but hardly significant performance increases at significant cost increases, a strategy that simply does not make sense when Advanced Micro Devices (AMD) is making large performance increases at small costs. The only advantage I see here is on the supply side: While all its competitors are moving to 7nm and 5nm during a time when supply for these productions are constrained, Intel is moving upward to 14nm, which has essentially no supply pressures. The main advantage here is that Intel will be able to produce processors in a market in which AMD processors are consistently sold out.

But I wouldn’t be bullish here. Being bullish due to this – likely temporary – demand/supply divergence is like being bullish on knock-off dolls from China for the reason that Tickle-me Elmo dolls are sold out. I don’t want to be investing in a product that is bought simply because the better choices are not available.

However, this might be good for Intel’s datacenter game. If a datacenter knows that it can reliably obtain Intel processors, it might be more likely to “settle” for Intel over its competitors. Then again, this is likely a temporary tailwind: Taiwan Semiconductor Manufacturing Company (TSM) is ramping up production, which will lead to more supply for AMD; Apple (AAPL) potentially moving its production from TSM to Samsung (OTCPK:SSNLF), as some suspect, could also help free up TSM’s production line for AMD, and so we could see AMD bounce back on the supply side against Intel shortly.

Overall, these new chips from Intel are looking increasingly underwhelming, especially when compared to AMD’s future outlook.

Trade Strategy

The tech market is almost undeniably in a bubble. Multiples are nearly as high as they were in 1999. I think this can continue for a while longer because unlike in 1999, most of the tech companies responsible for this rally have strong balance sheets and earnings growth.

In such a bubble, it is tempting to short tech. But in light of tech companies seeing strong earnings and revenue growth, the best short idea is to short tech companies that are not showing strong growth. Intel happens to be one such company, and so both the tech bubble macro thesis and the stock-specific bearish thesis I outlined above are in agreement:

(Source: Simply Wall St)

As tech stock mania and trading euphoria remain in play, I think INTC does have the possibility of trending sideways, being bolstered by speculators and $1400 stimulus checks in traders’ pockets. But the long-term thesis is a bearish one for this company. In such a situation, selling call options is a higher probability strategy than buying puts or shorting stock.

Right now I like the weekly calls that are slightly out-of-the money. Here’s my trade:

Sell Mar12 $58.50 calls

Instead of long puts here, the short calls protect us from losses should INTC rise slightly. This is due to the time decay in the calls, raising the break-even price. This strategy speculates on INTC either falling or trending sideways over the coming week and has a much higher probability of profit than long puts.

The risk of this strategy, of course, is unlimited loss, should INTC rocket upward in the coming week. I believe INTC is highly unlikely to rise quickly, and in light of the probability of a fall or consolidation, this is a calculated risk. If you are afraid of such a risk or do not have the margin for this play, you should probably not sell calls but employ a different bearish option strategy.

Earnings

As INTC heads into its earnings report next month, I expect some downward drift. I advise anyone employing the above strategy to stop before the earnings report due to the risk of an upward movement on an earnings surprise. Although I expect a selloff on earnings due to poor earnings growth, I would try a risk-hedged options strategy rather than be short calls simply due to the risk/reward curve being much steeper over earnings.

Intel’s revenue is dropping each quarter. This is occurring while AMD’s revenue is nearly doubling every year. I believe this earnings report will be a wake-up call for many INTC investors. We should see many jumping ship, moving their capital over to AMD, TSM, or other similar stocks.

Intel’s main advantage in this market – its fabs – is becoming more of a liability than an asset. To compete with AMD, Intel has had to drop prices, which certainly makes maintaining the economy of scale from the possession of fabs as well as the research and development costs required less realistic. Intel’s situation is looking increasingly dire, and I think that each earnings report in 2021 will be an important piece of insight hinting to INTC investors to dump the stock before it’s too late.

We can profit from this, especially if we get in early. I’ll be looking more in-depth at Intel’s earnings trade for the upcoming quarter in my newsletter. If you have any questions, let me know.

Happy trading.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in INTC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.