Intel shares plunged 7% in a day. They're overheating like the dot-com era - Bloomberg

Shares of struggling processor maker Intel plunged 7% on August 20. In addition to the general selloff that has gripped the technology sector, the reason for the drop was a report from CNBC sources that the company is considering raising capital from large investors through a discounted stock offering. Before Wednesday's collapse, Intel's stock had been surging in August - so much so that it reached levels last seen during the dot-com bubble more than 20 years ago, Bloomberg noted. Analysts consider the chipmaker's stock to be heavily overbought.

In trading on Wednesday, August 20, shares of Intel collapsed by 7% - to $23.54. Intel shares have been highly volatile in recent days due to reports that the administration of U.S. President Donald Trump may get about 10% in the company, as well as the investment of $2 billion in Intel by Japanese conglomerate SoftBank.

But on Wednesday, the decline intensified after CNBC sources reported that the company is discussing with a number of large investors the possibility of raising more capital by offering shares at a below-market price. Intel is looking for additional capital even after the SoftBank deal, as the government becoming a shareholder will not bring new investments to Intel. As Bloomberg wrote, the Trump administration wants to convert into securities grants allocated to Intel under the CHIPS and Science Act, under which the U.S. Department of Commerce subsidizes chipmakers developing domestic production.

Washington will simply turn the grant issued under President Joe Biden into a non-voting stake in Intel, U.S. Commerce Secretary Howard Lutnick said Aug. 19. He did not specify the size of the stake in question.

"They [Intel] need the money to build things that customers will actually need in the long run," host David Faber said on Squawk on the Street. - "And if CHIPS Act money, which is kind of considered 'free,' is turned into a stake in the company, that's more of a downside for them because it causes capital dilution."

The deal between Intel and SoftBank involves the issuance of about 87 million new shares, which implies dilution of the existing shareholders' stake by about 2%, MarketWatch writes. And the purchase of 10% of Intel shares by the U.S. government could mean the transfer of a stake worth more than $10 billion to the government - approximately how much the company should receive in the form of Chips Act grants (maximum - $10.9 billion).

"This additional stock dilution raises some concerns for us, but the possible benefits of a good relationship with Trump or his potential successor could outweigh that, especially if Intel literally becomes a 'bargaining chip' in future trade deals," Melius Research analyst Ben Reitzes wrote Aug. 20 in a note cited by Barron's. - In addition, customers may keep in mind the potential upside from the administration's favor by choosing Intel as a contractor for chip manufacturing." Reitzes on Aug. 20 reiterated a hold recommendation on Intel stock and a target price of $25, up 6% from the current price.

Bernstein analyst Stacey Rasgon, on the other hand, is skeptical of the prospect that reliance on the U.S. government will help Intel attract new customers.

"We continue to question how much pressure the [Trump] administration can or should 'push' on customers," MarketWatch quoted Rasgon's note as saying. - If Intel can't offer products with acceptable costs and quality, no amount of urging will help." Bernstein maintains a "hold" recommendation on Intel stock with a $21 target price.

Potential government involvement could give Intel short-term benefits but turn out to be a risk in the long run, said Paul Nolt, a market strategist and senior asset manager at Murphy & Sylvest Wealth Management. "It looks like an easy path that's easy to take but hard to get off of later," he said in an interview with Bloomberg. - Ultimately, it raises a lot more questions than it answers."

Most of the 43 analysts tracking Intel stock recommend a hold: 37 rate Hold. Four analysts advise to sell the stock (Sell) and two advise to buy (Buy). The Wall Street consensus price target is $22.15, down 6% from the stock's closing price on August 20.

Shares of the struggling chipmaker jumped 28% from early August to Wednesday's collapse, adding about $24 billion to its market capitalization. As a result, the stock's price-to-earnings ratio reached 53, the highest since the dot-com bubble collapse in early 2002, Bloomberg reported.

"The stock looks extremely overvalued," Wayne Kaufman, chief market analyst at Phoenix Financial Services, told Bloomberg. - Such a multiple means betting that the government will push Intel so aggressively that the company will come out on top."

Intel's high valuation largely reflects not the company's successes, but the scale of its profitability decline in recent years, emphasizes Bloomberg. Intel's adjusted earnings are forecast to exceed $1 billion over the next four quarters. And over the previous four quarters, the company posted losses of $1.3 billion, the agency notes. By comparison, Intel earned more than $20 billion a year on average between 2018 and 2021.

"We don't know what to expect from Intel in terms of earnings growth - it's too far behind technologically, and you can't generate growth with cost cuts alone," Nancy Tengler, CEO of investment firm Laffer Tengler, told Bloomberg. - It's hard to believe the forecasts, and therefore hard to judge the valuation. In my view, the securities are overvalued, but the picture is so uncertain that they wouldn't be attractive at any price."

This article was AI-translated and verified by a human editor