“Shares of Intel (NASDAQ: INTC) are down 2% in pre-open Thursday after Morgan Stanley analyst Joseph Moore downgraded to Underweight from Equal Weight with a price target of $47.00 per share (down from the prior $55.00).
Although Moore says he likes the turnaround story that is underway at Intel, he argues that “the next couple of years are likely to see the stock move sideways and we see more actionable opportunities elsewhere in our coverage.
In particular, Moore prefers GlobalFoundries (NASDAQ: GFS) to Intel as the former “acts as a hedge against the risk of both US gov't support for domestic foundry and new business opportunities moving out of Asia as customers diversify.”
“While INTC is betting big on its foundry business, and recently purchased a smaller foundry in Tower Semiconductor, GFS already has a strong and growing customer base based on proven know-how and manufacturing capability,” Moore said in a client note.
In essence, Moore doesn’t see a clear positive catalyst path for Intel.
“The aggressive investment in capacity in pursuit of revenue growth opportunities in foundry and graphics point to minimal free cash flow in the next couple of years – as guided, to be clear – but also drive a substantial increase in the underlying components of cost of sales (depreciation, labor, and overhead seem likely to rise 40%+ in the forecast horizon, in contrast to sales growth that's forecasted to be negative this year and low single digits next year),” the analyst added.
Moreover, Moore questions whether Intel can still be seen as a value play as “the reality is that ramp of fixed costs create a more “all-or-nothing” situation where the company is going to need to succeed in these new businesses – and still turn around their core business – or be looking at long term gross margin and cash flow degradation.”
The analyst also upgraded GFS to Overweight from Equal Weight with a $72.50 per share price target, while downgrading Qorvo (NASDAQ: QRVO) and Teradyne (NASDAQ: TER) Equal-Weight from Overweight”
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