Every chip stock investor should have a position in Intel, and we were just reminded why

The prospect of tighter U.S. restrictions on exports to China and recent comments from presidential candidate Donald Trump have taken some of the wind out of chip stocks’ sails. Semiconductor shares fell as the Biden administration raised the prospect of tougher trade restrictions on the industry, while Trump suggested that if elected he would want Taiwan to pay the U.S. for its defense. Taiwan, home to a leading foundry operator Taiwanese semiconductor production (NYSE:TSM)accounting for about 62% of the revenue generated by chip foundries worldwide, according to TrendForce. Concerns about the future led to a sell-off at TSMC and stocks such as Nvidia (NASDAQ: NVDA) And Advanced micro devices (NASDAQ: AMD)which rely on TSMC’s factories for production and also reported significant sales to China.

One of the few stocks that reacted positively to this news from the presidential candidates was Intel (NASDAQ: INTC)whose stock soared Wednesday before falling back for a modest gain. And while that wave of enthusiasm quickly faded, it was a reminder of why serious semiconductor investors should have at least some Intel stock in their portfolios.

The State of Intel

Granted, Intel’s glory days are probably long behind them. It lags AMD in chip design, and its new off-site fab operation, Intel Foundry Services (IFS), lags TSMC and Samsung in the field of process technology.

But Intel has the advantage of location: most of its foundries are located outside East Asia. So when political figures raise the prospect of trade restrictions or say things that heighten concerns that China might invade Taiwan, investors see Intel as a safer bet.

The assumption that China will invade Taiwan is speculation. What is not speculation is that the chip foundry industry is concentrated in Taiwan. To achieve this goal, the US and other Western governments are offering chipmakers tens of billions of dollars in subsidies to build more advanced fabs in the US and Europe.

Such subsidies benefit Intel and its plans to build state-of-the-art fabs. Moreover, since it buys the most advanced chip manufacturing equipment from ASMLthe potential to quickly overtake the competition is greater than some might think.

Understanding Intel’s Finances

As a result of investments in building production capacity, Intel’s finances are improving but still struggling. In the first quarter, revenue rose 9% year-over-year to $13 billion. That was a notable improvement from the 14% decline in revenue for the full year 2023.

Amid heavy investments in the future, it spent 15% more on operating costs. Despite that increase, its net loss in Q1 shrank to $381 million, a small fraction of the $2.8 billion it lost in Q1 2023.

Management did not forecast significant revenue growth for Q2. As a result, the stock has fallen more than 30% so far this year. In the absence of political unrest surrounding Taiwan, investors should not expect the semiconductor stock to outperform the S&P 500 shortly.

Yet this stock is now trading at a price/sales ratio of less than 3, which is a huge discount compared to comparable stocks.

INTC PS Ratio data from YCharts.

The ultimate measure of Intel’s low valuation, however, is its price-to-book ratio of 1.4. This means that its total market cap is only 40% higher than the market value of its assets. According to Stern College of Business, the average book value multiple in the chip industry is above 7, implying that Intel stock is significantly oversold.

Intel as cover

Given Intel’s current position, it’s a tool investors can use to hedge their positions in chip companies that are more closely tied to China and Taiwan. Stocks bought now could ultimately prove to be a cheap investment in a market leader.

Granted, it is unlikely that Intel stock will beat the indexes anytime soon. The huge investments the company has made are no guarantee that the company will be able to compete with its peers.

However, it is likely to close much of the gap over time, and current and future activity in the US and Europe protects the semiconductor industry from potential turmoil in East Asia. When one also considers the low valuation, a position in Intel could protect chip stock investors and potentially yield significant returns over the long term.

Should You Invest $1,000 in Intel Now?

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Will Healy has positions in Advanced Micro Devices and Intel. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long Jan 2025 $45 calls on Intel and short Aug 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.