As the next generation of mobile-phone technology begins to hit the market, one analyst suggests a pairs trade: Investors should buy Qualcomm stock and profit from downside in Intel.
Intel (ticker: INTC) stock slipped 1.6% to $58.58 in Monday trading and Qualcomm (QCOM) climbed 1.3% to $91.33.
Citi Research analyst Christopher Danely wrote in a note to clients Monday that investors should bet against Intel, which he rates the equivalent of a Sell, saying it will be embroiled in a price war with Advanced Micro Devices (AMD), among other things. Qualcomm, on the other hand is well positioned to benefit from a new generation of mobile-device technology and take a bigger share of sales of parts to Apple (AAPL).
A pairs trade typically involves two stocks whose movements are inversely linked. An investor shorts, or bets against one, while taking a long position in the other.
The case against Intel’s profit increasing is twofold. First, the venerable chip maker is in a processor price war with rival AMD, which is likely to drive down the price of its chips, Danely wrote. Second, the analyst sees falling demand from the personal-computer and data-center end markets as Covid-19-related restrictions ease, making it possible for more people to return to the office, rather than working from home.
In the longer run, Danely wrote that it is looking more likely that Intel is having trouble with a new microprocessor-fabrication technology and may end up buying production services from Taiwan Semiconductor Manufacturing (TSM).
Of the 43 analysts that cover Intel, 16 have the equivalent of Buy ratings, 21 rate it at Hold and six consider it a Sell. The average target price is $64.68.
Intel trades at 13.6 times forward earnings and is the second- cheapest stock in the PHLX Semiconductor Index, after Micron Technology (MU).
Qualcomm is an attractive stock at current prices, according to Danely, because it is selling its chips for higher prices, has made gains in market share for parts used in Apple products, and will benefit as consumers upgrade to 5G mobile devices. He said that when the world upgraded to LTE devices, the royalty rate Qualcomm receives from users of its patents rose by 0.2 percentage points,
Something similar is likely to happen in the coming months, he said.
Wall Street generally likes Qualcomm, though it is relatively cheap compared with other chip companies. Of the 30 analysts that cover Qualcomm, 19 rate it at Buy, eight rate it at Hold and three advise selling the stock. The average target price is $96.50, slightly above the stock’s current level,
Qualcomm has a price/earnings ratio of 20.1, making it the sixth- cheapest stock in the PHLX.
Intel stock has fallen 2.1% this year as Qualcomm advanced 3.5%, leaving both stocks behind the PHLX Semiconductor Index’s gain of 10%. The Nasdaq Composite is up nearly 16%.