Intel stock is down about 60% this year due to several issues, including losing market share to rival AMD in both PC and server spaces, as well as the industry’s broader transition from CPUs to GPUs in the era of generative AI manufacturing missteps. Now we believe Intel stock is undervalued after the selloff. Our fair estimate puts the stock at $27 per share, almost 30% higher than the current market price, due to the company’s low valuation, potential regulatory benefits under Trump, etc. The company’s upcoming launch of the 18A manufacturing process next generation that could reverse the story of the stock. (See our analysis of Intel’s rating : Expensive or cheap?) However, there are risks and there is still a good chance that things will get worse before they get better. In fact, Intel stock is down about 20% in the last month alone. In this analysis, we look at how Intel stock could fall about 50% from current levels to around $10 per share, taking into account three key metrics, namely revenue, net margins, and price-to-earnings ratio. In addition, the Fed’s lowered forecast for the number of interest rate cuts also impacted other areas of the market. See Could Fed Pessimism Push Bitcoin Below $80,000?

There is no guarantee of a sales recovery

Intel sales fell from $79 billion in 2021 to $54 billion in 2023 as CPU sales fell due to the PC market slowdown after Covid-19 and also due to market share gains by rival AMD and threats from ARM-based Chipsets that are more portable, declining and power efficient compared to Intel’s x86 chips. The increase in demand for GPU chips for AI applications – an area in which Intel has a relatively limited presence – has also had a negative impact. While the PC market is recovering and sales are expected to grow in the low single digits this year, Intel’s sales do not yet appear to be experiencing a significant recovery. Consensus estimates are predicting a 3% decline in sales this year, while sales are forecast to decline 6%. growth next year. There is still a chance that Intel’s sales will remain flat in the meantime due to a few factors. Regardless, if you want an uptrend with a smoother trajectory than an individual stock, consider the following: High quality portfolio, which has outperformed the S&P and returned >91% since inception.

Why?

Intel is relying heavily on the foundry model — essentially using its manufacturing capabilities to make chips for outside customers — to turn around its business. However, there is 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 recently. (See Is Intel Foundry Poised for a Comeback?) However, Intel’s track record of internal implementation is cause for concern. Intel’s recent move to advanced process nodes has 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 some of the manufacturing of its newer chips to TSMC of Taiwan. Given Intel’s difficulties in manufacturing its chips, it’s fair to wonder whether the company can be trusted to reliably produce chips for others at scale. Earlier this month, Intel announced that CEO Pat Gelsinger, the architect of the foundry pivot, would be stepping down from the company. In addition, shareholders filed a lawsuit last week alleging that Intel’s top executives made false and misleading statements that its foundry business violated federal securities laws. These developments may not inspire confidence in the foundry business. See also Palantir Stock Up 4.5x This Year: Time to Rethink?

Intel’s CPU business could come under further pressure. While AMD has gained market share in both the data center and PC markets, more competition could be on the horizon. The age of generative AI could open the doors to more competition as PC makers look to incorporate more AI intelligence into their devices. For example, 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 capabilities and use less power. There could be challenges on the server front, as accelerated computing servers used for generative AI applications typically only require one CPU for eight or more GPUs in AI servers. In addition, GPU manufacturers like Nvidia are playing a larger role in the overall design of server systems and are trying to replace Intel CPUs with lower-performance ARM chips instead of Intel. This could impact Intel’s core business.

Intel is clearly behind. Although the company strives to build momentum, there are also challenges here. After a series of layoffs and cost-cutting initiatives, employee morale probably won’t be all that high. Customers and buyers may also reconsider their commitment to Intel’s products and services. Consumers want the “best,” and if they believe Intel is not the future, customers today are less likely to make Intel their first choice. Everything just gets a little harder. According to the consensus estimates, Intel’s revenue will be around $52 billion this year, and there is a possibility that revenue will grow by just under 2% per year to around $54 billion by 2026 due to the factors mentioned above could.

Intel’s margins may continue to shrink

Intel’s adjusted net margins (net income, or profit after costs and taxes, calculated as a percentage of sales) have been on a declining trend – falling from over 28% in 2021 (and previous years) to around 11%. in 2022 in view of declining sales and loss of market share. Due to further declines in sales and significant losses in the foundry business, adjusted net margins fell to just under 8.5% in 2023. There remains a possibility that margins could fall to around 5% in the short term.

Why?

The costs associated with ramping up the foundry could have a negative impact on Intel’s bottom line. For example, it could take some time to achieve good production yields with the new 18A process. Additionally, Intel’s move to outsource production of its Arrow Lake chip to TSMC could potentially reduce utilization of its own manufacturing facilities in the near term. Intel isn’t exactly known for its production efficiency either. To illustrate, in 2023, Intel’s foundry business posted an operating loss of $7 billion on revenue of $18.9 billion. The company is expected to see a decline in sales this year but will continue to make a loss. Regardless, increased competition in the CPU space – where there are new entrants like Qualcomm and ARM – could potentially lead Intel to resort to some level of discounting, which would impact its margins.

How does this affect Intel’s valuation?

At the current market price of about $20 per share, Intel now trades at about 19 times 2023 earnings and about 20 times estimated 2025 earnings. The company is expected to report a loss in 2024. If we combine the scenario described above – which assumes average annual revenue growth of just under 2% between 2023 and 2026 and margins falling to around 5% – that means adjusted net income could be around $4.4 billion in 2023 ($1.05 per share) to approximately $2.75 billion in 2026 ($0.66), giving a decrease of 37%. Decline compared to 2023. Bad times make it easier to imagine worse times – and when that happens, a spiral can ensue that leads to investors assigning Intel an even lower multiple and reassessing Intel’s recovery path. For example, if Intel’s investors set a multiple of 15x due to continued underperformance, that would result in a stock price of around $10 per share.

What is the time horizon for this negative return scenario? While our example illustrates this for a schedule in 2026, in practice it doesn’t make much difference whether it takes two or four years. If the threat of competition prevails and Intel continues to struggle with production, there is a possibility of a significant correction in the share price.

INTC stock’s decline over the past 4-year period has been anything but consistent, with annual returns significantly more volatile than those of the S&P 500. The stock’s returns were 6% in 2021, -47% in 2022 and 95% in 2023. In contrast, the Trefis High Quality Portfolio is significantly less volatile with a collection of 30 stocks. And it has outperformed the S&P 500 every year in the same period. Why is that? As a group, the stocks in the HQ Portfolio offered better returns with lower risk compared to the benchmark index. Less of a roller coaster ride, as the HQ portfolio performance metrics show.

Still, we believe it pays to be patient – ​​and patient investors and customers will be rewarded. In this analysis, we examine the catalysts for Intel stock’s recovery. This is a long-established company with a glorious past and valuable know-how in a growing market. Our analysis suggests that victory is within reach – but it may not come quickly and may require patience.

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