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While Intel Corp (NASDAQ:INTC) has been a surprise winner of the broader tech ecosystem, it's unavoidable that the semiconductor giant represents a form of moral hazard, at least in the classical economic sense. Left to its own devices, Intel has struggled badly relative to its peers. However, thanks to the graciousness of the Trump administration, INTC stock is booming.
Intel still needs to prove, though, that it has truly earned its valuation spike rather than being a charity case — which is wildly ironic coming from this administration. And possibly, it's this irony that may have played at least some role in the latest analyst downgrade for INTC stock.
In August, the U.S. government announced that it would invest $8.9 billion in Intel's common shares. When combined with previously awarded grants, the total stake in INTC stock added up to $11.1 billion. Under the influence of Trump's leadership, Nvidia Corp (NASDAQ:NVDA) announced a major partnership with the chipmaker, dramatically padding INTC's performance.
Still, concerns are brewing. Just a week-and-a-half ahead of Intel's upcoming earnings disclosure, Bank of America Securities analyst Vivek Arya downgraded INTC stock to Underperform from Neutral, while maintaining a $34 price target. Although the expert cited a strong balance sheet, he expressed concerns about the semiconductor specialist maintaining its competitiveness across its central processing unit (CPU) and artificial intelligence businesses.
Essentially, Arya noted that Intel Intel lacks a competitive AI portfolio and struggles in server CPU performance. Further, the company now has less flexibility to divest unprofitable manufacturing operations.
Here's the bottom line: with INTC stock up roughly 50% in the trailing month, there's a high risk that it could incur a classic case of buy the rumor, sell the news.
To be quite blunt, the common-sense approach to INTC stock at this juncture may be the most convincing. After all, with INTC trading at 56.5-times forward earnings, the chipmaker must demonstrate not only that the equity warrants this premium, it also must convince investors that more profits are in the pipeline. That's an incredibly tall order for a company that has severely lagged behind its rivals in the last five years.
However, the mathematical argument is also very convincing. When arranging the projected 10-week return of INTC stock as a probabilistic distribution, the aggregate data going back to January 2019 forms a skewed bell curve. At the end of the two-month period, most outcomes are expected to fall below the starting point or anchor price.
That said, the market is rarely homeostatic, responding constantly to bullish and bearish pressures. Further, we know from GARCH (Generalized Auto-Regressive Conditional Heteroskedasticity) studies that volatility clusters rather than diffuses linearly. In other words, the probability of volatility today depends largely on the magnitude of volatility yesterday.
Quantitatively, in the last 10 weeks, INTC stock has printed a 7-3-U sequence: seven up weeks, three down weeks, with an overall upward trajectory across the period. Nothing about these sequences is special but by converting the continuous signal of price action into a discrete signal, we can algorithmically isolate specific subsets within the same population to observe any potential behavioral discrepancies relative to the baseline.
Unsurprisingly, the aggregate curve and the conditional curve (of the 7-3-U sequence) form a bimodal distribution: essentially, two different behavioral patterns. However, what makes INTC stock problematic is that under 7-3-U conditions, the chances of downside relative to the anchor are greater than the baseline distribution.
With Wall Street analysts raising concerns about forward viability — and the math very much confirming this apprehension — INTC stock appears at high risk of incurring a correction.
For those who are willing to take the risk, the 37/34 bear put spread expiring Nov. 7 could be intriguing. This transaction involves buying the $37 put and simultaneously selling the $34 put, for a net debit paid of $145 (the most that can be lost in the trade).
Should INTC stock fall through the second-leg strike price ($34) at expiration, the maximum profit would be $155, a payout of nearly 107%. Breakeven comes in at $35.55, which would require INTC to drop by almost 4% from the time-of-writing price.
Under ordinary circumstances, this would be an aggressive trade. On an aggregate level, INTC stock would be expected to drift sideways before tailing off near the end of the forward 10-week period. However, under 7-3-U conditions, the volatility could arrive sooner.
Tack on the blistering 50% rally in the past month, along with analyst apprehensions, and the 37/34 bear put makes sense. Depending on how the earnings report plays out, this spread might even be considered conservative.
The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.
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