You’ll Wish You Hadn't Ignored Intel Stock

Intel stock (NASDAQ: INTC) rallied by close to 6% in Monday’s trading and gained by another 8% in after-hours trading, taking the stock to levels of about $22 per share. Intel stock still remains down by over 50% year-to-date. Now the recent surge comes following news that Intel has secured a manufacturing contract from Amazon for its foundry business, where it will design and produce custom AI chipsets for Amazon’s cloud division, AWS. Intel will produce the specialized “AI fabric chip” for Amazon, using its 18A manufacturing process, which is the company’s most advanced chip manufacturing technology. Intel also indicated that more chip designs from AWS could be coming, including versions that will leverage Intel’s upcoming 18AP and 14A processes. Separately, Bloomberg reported last Friday that Intel has received $3.5 billion in grants from the Pentagon to manufacture chips for the U.S. military, although Intel declined to comment on the Pentagon grants. The new wins present a big opportunity for Intel. If the company executes well on its foundry plans and delivers compelling new CPU and GPU chips, Intel could see almost 3x upside. On the other hand, if it fails to execute, Intel stock could see a downside to $10

Now INTC stock has declined over the last 3-year period and the fall 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. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could INTC face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months - or will it see a recovery?

For years, Intel has faced growing frustration from investors as it lost market share to AMD in the PC and server sectors. Adding to this, the industry has been shifting from CPUs to GPUs, particularly in the generative AI era, where GPUs are better suited for the intensive computational tasks that AI demands. The recent wins with Amazon and the Pentagon could mark a turning point for Intel, as generative artificial intelligence dominates the narrative in the computing and semiconductor markets. The Amazon deal, in particular, is seen as a strong vote of confidence in Intel’s improving chip-making capabilities given AWS’s position as the largest public cloud services provider. Intel’s foundry business which has been at the heart of the company’s struggles, has lagged behind competitors like Taiwan Semiconductor Manufacturing and Samsung. Intel’s attempts to reclaim leadership in chip fabrication have been very capital-intensive and have been hampered by the company’s manufacturing and design missteps. In fact, Intel has had to outsource production of some of its latest CPUs to TSMC. In 2023, Intel’s foundry business reported a $7 billion operating loss on $18.9 billion in revenue, highlighting the scale of the challenges it has faced.

Much of the future of Intel’s manufacturing roadmap hinges on the success of the new 18A process. While production on this process is expected to begin in 2025, Intel announced in early August that it had reached critical milestones, noting that the chips made with this process had powered on, booted Windows, and were operational within Intel. Once Intel transitions its latest server and PC chips to this process node, ending its outsourcing of chips to TSMC, we could see higher utilization rates, which would help reduce costs. Additionally, Intel indicated that the first external foundry customer was expected to tape out (move from design to foundry for manufacturing) on the 18A node in the first half of 2025. This could also boost Intel revenues to a certain extent. A key challenge for Intel will lie in meeting production yield expectations at a large scale. However, there have been encouraging signs here as well. Intel recently indicated that the production process was seeing a defect density of 0.4. Defect density refers to the number of defects present per unit area on a wafer and a metric of under 0.5 defects per square centimeter is considered favorable. Intel still has a couple of quarters for the production technology to enter mass production, meaning that it could improve the tech further.

We believe that Intel’s valuation is reasonable, with the stock trading at just about 20x consensus 2025 earnings. Intel is getting much more serious about its cost cuts. The company intends to cut over 15% of its workforce, which could amount to over 15,000 layoffs while aiming to slash costs by as much as $10 billion by next year. This could help manage the company’s bottom line over the coming quarters as its next wave of CPU, GPU, and foundry bets begin to bear fruit. We value Intel stock at about $30 per share presently, which is well ahead of the current market price of $22 (based on pre-market price on Tuesday). See our analysis of Intel Valuation for more details on what’s driving our price estimate for Intel. We also highlight the catalysts for Intel stock recovery in this analysis. Intel 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 require some patience.

MORE FROMFORBES ADVISOR
Best Tax Software Of 2022
Best Tax Software For The Self-Employed Of 2022
Income Tax Calculator: Estimate Your Taxes

While investors have their fingers crossed for a soft landing by the U.S. economy, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During Market Crash captures how key stocks fared during and after the last five market crashes.

Invest with Trefis Market Beating Portfolios

See all Trefis Price Estimates