Intel stock has declined by about 60% this year, amid several issues including the loss of market share to rival AMD in both the PC and server space, as well as the industry’s broader transition from CPUs to GPUs in the generative AI era, besides significant manufacturing missteps. Now we believe that Intel stock is undervalued post the sell-off, with our fair estimate of the stock’s coming at $27 per share almost 30% ahead of the current market price on account of the company’s low valuation, potential regulatory benefits under Trump, and the impending rollout of its next-gen 18A fabrication process which could turn the narrative around on the stock. (See our analysis of Intel’s valuation : Expensive or Cheap?) However, there are risks and there remains a decent chance that things could get worse before they get better. In fact, Intel stock has fallen by about 20% over the last month alone. In this analysis, we highlight how Intel stock could fall about 50% from current levels to about $10 per share, considering three key metrics, namely revenues, net margins, and price-to-earnings multiple.
There’s No Guarantee Of A Revenue Rebound
Intel revenues dropped from $79 billion in 2021 to $54 billion in 2023 as CPU sales declined due to the cooling off of the PC market post-Covid-19 and also due to market share gains by rival AMD and threats from ARM-based chipsets which are more portable and power efficient compared to Intel’s x86 chips. The surge in demand for GPU chips for AI applications- an area where Intel has a relatively limited presence – has also hurt. While the PC market is recovering with sales projected to grow by low single-digits this year, Intel’s revenues don’t look like they see meaningful recovery just yet, with consensus estimates projecting a 3% dip in sales this year while estimating a 6% growth next year. There remains a possibility that Intel could see its revenues stagnate in the interim due to a few factors. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
Why?
Intel is betting big on the foundry model – essentially using its manufacturing capabilities to make chips for external customers – to turn around its business. However, there’s no guarantee that this will pay off. The company’s latest 18A process, its most advanced manufacturing technology to date, is the cornerstone of its foundry business and there have been some positive developments of late. (See Is Intel Foundry set for a comeback?) That said, Intel’s track record on internal execution raises concerns. Intel’s recent transitions to advanced process nodes have been quite inconsistent. For example, the 10nm node faced significant yield and manufacturing setbacks a few years ago. Similar challenges could arise with the 18A process. These difficulties even forced Intel to outsource a part of the fabrication of its newer chips to Taiwan’s TSMC. Given Intel’s struggles in manufacturing its chips, it’s fair to question whether it can be reliably counted upon to produce chips for others at scale. Earlier this month, Intel announced that CEO Pat Gelsinger who was the architect of the foundry pivot would be resigning from the company. Separately, shareholders also filed a lawsuit last week claiming that Intel’s top executives made false and misleading statements regarding its Foundry business violating federal securities laws. These developments may not inspire confidence for the foundry business.
Intel’s CPU business could face further pressure. While AMD has gained market share in both the data center and PC markets, more competition could be in the offing. The generative AI era could open the doors to more competition as PC makers look to incorporate more AI smarts into their devices. For instance, both chip-designer ARM and mobile chipset specialist Qualcomm are pushing into the PC space and Microsoft’s latest Copilot+ PCs use ARM chips that offer AI features and consume less power. There could be challenges on the server front as accelerated computing servers used for generative AI applications typically require just one CPU for eight or more GPUs in AI servers. Moreover, GPU makers such as Nvidia are playing a bigger role in overall server system design, looking to replace CPUs from the likes of Intel with lower-powered ARM chips instead of Intel’s. This could impact Intel’s bread-and-butter business.
Intel is clearly on the back foot. While the company is keen to build momentum, there are challenges here. Employee morale is unlikely too high, after a slew of layoffs and cost-cutting initiatives. Customers and buyers could also rethink committing to Intel’s products and services. Consumers want the ‘best’ and if they believe that Intel isn’t the future – it’s less likely to be the choice for customers today. Everything becomes just a bit harder. Intel revenues are projected at roughly $52 billion for this year per consensus estimates and there is a possibility that sales could grow at a level of just about 2% per year to about $54 billion by 2026, due to the factors above.
Intel’s Margins Can Contract Further
Intel’s adjusted net margins (net income, or profits after expenses and taxes, calculated as a percent of revenues) have been on a declining trajectory – they fell from levels of over 28% in 2021 (and in years before that) to about 11% in 2022 amid declining sales and market share losses. Adjusted net margins fell to just about 8.5% in 2023 due to further sales declines and considerable losses in the foundry business. There remains a possibility that margins could fall to about 5% in the near term.
Why?
Costs associated with the foundry ramp-up could hurt Intel’s bottom line. For instance, achieving good production yields with the new 18A process could take time. Moreover, Intel’s move to outsource production of its Arrow Lake chip to TSMC could potentially reduce the utilization of its own manufacturing facilities in the near term. Intel has also not exactly been known for production efficiency. For perspective, in 2023, Intel’s foundry business reported an operating loss of $7 billion on sales of $18.9 billion, and the business is expected to see revenues contract this year while remaining loss-making. Separately, higher competition in the CPU space – where there are new entrants such as Qualcomm and ARM – could possibly prompt Intel to resort to some level of discounting, impacting its margins.
How does this impact Intel’s valuation?
Now at the current market price of about $20 per share, Intel trades at about 19x 2023 earnings and about 20x estimated 2025 earnings. The company is projected to post a loss in 2024. If we combine the scenario we detailed above – which assumes an average of just about 2% annual revenue growth between 2023 and 2026 with margins falling to about 5% – this means that adjusted net income could fall from about $4.4 billion in 2023 ($1.05 per share) to about $2.75 billion in 2026 ($0.66), a 37% decline compared to 2023. Bad times make it easier to imagine worse times – and when that happens, things can spiral causing investors to assign an even lower multiple to Intel re-assessing Intel’s recovery path. For example, if Intel’s investors assign a multiple of 15x following its continued underperformance, this would translate into a stock price of roughly $10 per share.
What about the time horizon for this negative-return scenario? While our example illustrates this for a 2026 timeline, in practice, it won’t make much difference whether it takes two years or four. If the competitive threat plays out, with Intel also continuing to struggle with manufacturing, there is a possibility of a meaningful correction in the stock.
The decrease in INTC stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 6% in 2021, -47% in 2022, and 95% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
With all that being said, we do believe it pays to be patient – and patient investors and customers will be rewarded. We highlight the catalysts for Intel stock recovery in this analysis. This is a storied company with a glorious past and valuable know-how in a growing market. Our analysis suggests that a win will be at hand – it just may not be quick and may require patience.
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