I last covered Intel (NASDAQ:INTC) in January; I put out a Sell rating at the time, and since then, the stock has dropped ~35% in price. Now, I believe that the company is valued fairly, which has led me to revise my rating for Intel to a Hold. I believe that the bulk of the sell-off, which was warranted due to a decline in earnings, has now ended. Therefore, Intel’s near-term future is beginning to look a lot brighter, and there may be significant growth over the next few years to capitalize on. However, I am still skeptical about how much reliable growth the firm can achieve over 10+ years, due to it already being such a large business that has not delivered highly competitive growth over the last decade in either its top or bottom lines.
Earnings & Price Contraction Recovery
Intel experienced a significant drop in earnings and revenue over the last few years:
This was primarily a result of these causes:
- Intel faced bottlenecks in wafer-level assembly, constraining its ability to meet demand, particularly for its AI-focused Core Ultra processors.
- The company pushed aggressively to bring five process nodes to market in four years, leading to significant startup costs. Intel’s Foundry Services unit saw a decline in revenues, and this unit has high costs to ramp up capabilities to allow it to compete in the foundry market.
- Intel is navigating intense competition from more modern companies like Nvidia (NVDA) and Advanced Micro Devices (AMD). Intel’s new launches, like the 5th Gen Intel Xeon processors and Gaudi 3 AI accelerators, have not yet substantially boosted revenue.
- Market saturation, competitive pressures, and delays in technological adoption have caused declines in core segments like Network and Edge, and Data Center and AI.
- There are macroeconomic challenges at the moment, including growth stagnation, high interest rates, and geopolitical upheavals contributing to supply chains and market demand.
According to Seeking Alpha’s data, analysts are expecting on consensus for Intel’s EPS to have three-quarters of contraction, with a large rebound beginning in FQ1 2025. Personally, I think the situation could improve sooner. Intel is focusing on its AI PC push this year, with a forecast of 40 million AI PCs sold by the end of 2024. Also, now that Intel Foundry Services is more developed, it should be able to begin to incrementally experience the benefits of profitability from the project. By late 2024 at the latest, the company’s long-term strategy based on AI solutions and the expansion of its manufacturing solutions should start to be noticeably paying off. The foundry service segment already showed a 63% revenue increase in the last quarter, so positive momentum is certainly building.
Long-Term Competitive Challenges Ahead
Intel faces significant long-term challenges from three major competitors, in my opinion:
AMD (Advanced Micro Devices) | AMD is known for high-performance computing products, including CPUs and GPUs |
Nvidia | Nvidia specializes in GPUs and AI computing. Nvidia is also a leader in AI hardware and software solutions. |
TSMC (Taiwan Semiconductor Manufacturing Company) (TSM) | TSMC is the world’s largest semiconductor foundry. It manufactures chips for major clients like Apple, AMD, and Nvidia. |
Intel has notably struggled to keep up with fast innovations in semiconductor manufacturing. The company faces perhaps the most crucial threat from TSMC because it is almost impossible to outperform the Taiwanese company. Instead, I believe Intel is going to have to navigate a moat for itself, which is relatively niche. It is unlikely to be the go-to provider for top-end production. Instead, it may find itself used for specialized and legacy technologies, custom and integrated solutions, foundry services for selected markets, advanced packaging technologies, and AI and machine learning solutions. This is not necessarily bad for Intel shareholders; it just means the investors in the company should prepare for slower and more moderate growth than Nvidia or TSMC.
INTC | NVDA | AMD | TSMC | |
FWD Revenue Growth 5Y Avg | -1.18% | 28.4% | 26.22% | 15.19% |
FWD EPS Diluted Growth 5Y Avg | -8.59% | 34.38% | 47.84% | 15.78% |
FWD Free Cash Flow Growth 5Y Avg | -8.51% | 40.79% | 75.94% | 14.88% |
TTM Net Income Margin 5Y Avg | 19.95% | 29.22% | 11.08% | 38.48% |
Equity-to-Asset Ratio | 0.55 | 0.64 | 0.83 | 0.63 |
FWD P/E GAAP Ratio | TTM = 32; FWD = Not meaningful | 47.5 | 115 | 26 |
FWD P/S Ratio | 2.5 | 24.75 | 10.5 | 8.5 |
For the numerical data, major strengths are in bold, and major weaknesses are in italics.
Clearly, Intel has been struggling much more recently than the larger cohort, which can be seen in historical earnings per share records over the last five years. We can also see how stark Nvidia’s success has been in contrast to the other three companies:
There are many reasons why I think Intel might struggle over the long term compared to AMD, Nvidia, and TSMC:
- Intel has struggled with delays in advancing its semiconductor manufacturing process technology. TSMC and Samsung (OTCPK:SSNLF) have moved to 5nm and 3nm nodes, but Intel has faced delays in transitioning to 7nm (Intel 4) and 5nm (Intel 3) nodes.
- AMD and Nvidia operate on a fabless model, using third-party foundries like TSMC. Intel’s device manufacturer (‘IDM’) model is more capital intensive, affecting free cash flow and total growth, and offers less flexibility.
- Nvidia has established itself as a leader in AI and machine learning with its CUDA ecosystem and specialized hardware like the Tensor Core. Intel’s acquisition of Habana Labs in 2019 and other attempts to penetrate the market are still far behind.
- TSMC’s focus on being the world’s largest and most dedicated foundry means that it is likely to be the top choice for major big tech companies for the foreseeable future, enjoying economies of scale and the most advanced capabilities. Intel’s IDM 2.0 strategy to produce its own chips and serve as a foundry might be too optimistic considering the intense competition, straining resources for less growth than anticipated.
In my opinion, investors are likely to see strong returns from Intel stock now that the valuation is more reasonable. However, over the long-term horizon of 5-10 years and more, I think that the growth story for Intel is unlikely to be as large as competitors AMD, Nvidia and TSMC. I think that Intel is positioning itself to capitalize well on the growing demand for digital goods in society, as well as a high future global economic demand for AI chips and infrastructure, which should be very accretive for Intel, but investors should consider how much of this market will be taken by the leaders in the field, most notably Nvidia in infrastructure, and TSMC in foundry services.
Valuation Analysis
Intel had a negative P/E GAAP ratio of -118 during my first coverage of the company. Now, its ratio is ~32. I think this is very promising for investors in the short-to-medium term, especially as Intel is likely to benefit from the financial benefits of its recent investments in late 2024 and throughout 2025. Its P/E GAAP ratio is only a +5% difference from the sector median. We can see in my peer analysis table above that Intel has the cheapest valuation at this time, with a price-to-sales ratio of 2.5, which is incredibly low compared to major competitors and even lower than its 5-year average for the ratio of 2.9. Once Intel begins to increase its earnings later this year, it is likely that the stock will begin to look much more appealing to investors, causing greater buying activity and driving the price up through momentum, including what I am hopeful could be a significant series of EPS YoY growth and potentially earnings beats throughout 2025.
I have also assessed Intel using a discounted cash flow model, where I used its 10-year average for FCF as the starting value because it currently has negative free cash flow. I used the company’s WACC based on the inputs I have listed below. My model indicates that the stock is roughly fairly valued at this time, with a margin of safety exactly calculated at negative 3.57%.
Key Elements
Intel faced a significant earnings and price contraction over the last few years, but now, conditions have begun to improve. A large part of Intel’s recent decline can be attributed to high startup costs, increasing competition, and macroeconomic stagnation.
Intel faces intense competition from modern firms, including Nvidia and AMD in chips and TSMC in foundry services. Intel is already far behind its leading peers in both aspects. Although Intel has strong exposure to trends in digitization and AI, the idea that it may be able to deliver the same high growth as competitors is likely too optimistic.
Intel is fairly valued now after being significantly overvalued in recent history. This is evidenced by its low forward price-to-sales ratio and only a slight overvaluation indicated by my DCF model when using a 10-year average for the FCF starting value.
Conclusion
Intel could be considered a Buy now, in my opinion, if focusing on the short-to-medium term. However, as a long-term investor with a holding period of 10+ years, I am allocating a Hold rating because I believe Intel is going to face more growth challenges over the next decade. While its valuation is now reasonable, I think investors can find better long-term, high-growth opportunities in the technology industry.
Read the full article here