Tuesday, 8 October 2024
by BD Banks
Intel (NASDAQ: INTC), one of the world’s largest chipmakers, has lost more than half of its market value over the past five years. Its business sputtered out as it grappled with production delays, chip shortages, and jarring strategic changes under different CEOs. But could Intel’s stock be worth buying again as it trades at its lowest prices in more than a decade?
The company is the world’s largest producer of x86 CPUs for PCs and servers. It designs and manufactures most of its own chips; its smaller competitor, AMD, outsources its production to third-party foundries like Taiwan Semiconductor Manufacturing, or TSMC.
For decades, Intel manufactured the world’s smallest, densest, and most powerful x86 CPUs. But with each generational upgrade, it became more challenging and expensive to manufacture smaller chips. As a result, many chipmakers — including AMD — spun off their capital-intensive foundries and outsourced the entire manufacturing process.
Image source: Getty Images.
Intel refused to follow AMD’s example and become a fabless chipmaker, but it also fell behind TSMC and Samsung‘s foundries in the “process race” to manufacture smaller and denser chips. It tried to catch up, but those messy efforts throttled the development and production of its own chips.
Many of its customers were frustrated by its persistent delays and shortages, so they pivoted toward AMD to procure a steady supply of higher-end chips produced by TSMC.
That’s why Intel’s x86 market share plunged from 82.2% to 62.8% between the fourth quarters of 2016 and 2024, according to PassMark Software. AMD’s share nearly doubled from 17.8% to 33.2% during the same period.
Intel also missed two major technological shifts. First, it didn’t leverage its dominance of the PC and server markets to launch a lasting lineup of mobile chips. Instead, Arm Holdings conquered that fertile territory by licensing its more power-efficient designs to a wide range of chipmakers.
Second, it didn’t spot the growing importance of discrete GPUs for processing artificial intelligence (AI) applications. That trend drove many companies to upgrade their data centers with Nvidia‘s high-end GPUs, but most of those customers didn’t prioritize their CPU upgrades.
Intel needs a steady hand to guide its turnaround, but its three latest CEOs took its business in different directions. Brian Krzanich, who stepped down in 2018, tried to diversify its business beyond PCs and server CPUs with programmable, automotive, Internet of Things (IoT), and memory chips.
His successor, Bob Swan, prioritized cost-cutting and big buybacks instead. He even considered turning Intel into a fabless chipmaker before he was ousted in 2021.
Pat Gelsinger, the chief architect of Intel’s i486 processor in the 1980s, then returned as its CEO and vowed to upgrade its foundries and catch up to TSMC and Samsung. The company secured billions of dollars in government subsidies to support that strategy, but that costly effort still hasn’t meaningfully narrowed the gap with its superior Asian competitors.
Intel is now reportedly mulling a spinoff of its foundry, a sale of its programmable-chip business, and the divestiture of its other noncore businesses. Gelsinger is still in charge, but those plans could completely reverse his original strategy.
From 2018 to 2023, the company’s revenue fell from $70.8 billion to $54.2 billion. Its earnings per share (EPS) plunged from $4.48 to just $0.40, and it suspended its dividend earlier this year. This decline was caused by its divestments, its market share losses to AMD, declining PC shipments, and macro headwinds that are preventing data centers from upgrading their CPUs.
For now, analysts expect Intel’s revenue to have a compound annual growth rate (CAGR) of 4% as its EPS has a CAGR of 38%. Those optimistic estimates are likely based on the expectations that Intel can ramp up its production of new chips, expand its third-party foundry business, and reclaim the process lead from TSMC and Samsung.
But in its latest quarter, Intel admitted it was struggling with low yield rates for its new 18A process, and crushing its own gross margins with the development of its new AI CPUs, which featured more native AI processing capabilities. Therefore, I wouldn’t be surprised if the company missed Wall Street’s long-term consensus estimates by a mile.
Even if Intel matches analysts’ expectations, its stock isn’t a screaming bargain yet. At $22.50, it still trades at 113 times next year’s earnings and 24 times its 2026 earnings. AMD and Nvidia — which are growing faster and face fewer existential challenges — trade at just 48 and 33 times next year’s earnings, respectively.
Therefore, I wouldn’t consider Intel to be a value stock right now. Its turnaround plans are murky and it might sell itself off in parts to right-size its business. It might be worth buying again once it finally explains what those plans are, but I wouldn’t touch it unless it provides more compelling reasons to believe in its long-term recovery.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.