Last Friday on 24 July 2020, Intel closed 16.24% down.

Although I do not own any Intel stock, I was curious why it fell after releasing their Q2 2020 results.

Just a while ago, I saw the news that after 15 years of partnership, Apple decided to break up with Intel and stop using its chips for Macs.

Here are four reasons why I think Intel fell by more than 16%:

1. Delay of Their 7 Nanometer Chips by About Six Months

Their rival AMD (Advanced Micro Devices) has already started selling their 7 nm chips.

This means that technologically, Intel is lagging behind AMD.

In the fast-paced technological environment, this delay is big news. After all, Intel’s competitive advantage will depend a lot on its technological advances.

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2. Expects Total Revenue in 3rd Quarter To Drop

Intel is a huge company.

One downside to being a huge company is that it is hard to maintain a high growth rate.

For Intel, they expect total revenues in the 3rd quarter of 2020 to reduce 5.16% year on year to $18.2 billion.

3. Gross Margin Dropped From 59.8% to 53.3%

Intel gross margin was 59.8% in 2Q 2019, now it has dropped to 53.3%. That is a sharp drop.

A drop in gross margin can be a sign of a drop in terms of its pricing power and potential competitive advantage.

Definitely not a good sign if it persists.

Also read: “Patience Produce Uncommon Profits” – Why Patience in Investing is Vital.

4. Exposure to China

Intel has exposure to China.

Recently US-China tensions are on the rise again. And that is not good news to add to Intel’s recent woes.

China is in fact Intel’s largest market. In fiscal 2019, they generated 28% of its revenue or about $20 billion from China.

Intel’s largest facilities are also located in Chengdu and Dalian.

In Conclusion

I think that Intel might be losing its long-term competitiveness in the market. In their industry, technological advantages are also an important source of competitive advantage. Being big and having economies of scale is no longer enough.

As to whether the company is currently undervalued or not, we will need to do our own valuation assumptions on that and decide.

See also: My 5 Key Takeaway From Temasek Portfolio Value in 2020.

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