Intel’s stock performance has been turbulent, experiencing a significant 60% decline this year. This downturn is attributed to several factors, including a loss of market share to competitor AMD in both the PC and server markets, the broader industry shift towards GPUs driven by the rise of generative AI, and substantial missteps in Intel’s manufacturing processes. Despite these challenges, the current market price of around $20 per share may undervalue Intel, with a fair estimate closer to $27. This positive outlook is based on the company’s low valuation, potential regulatory advantages under a Trump administration, and the anticipated launch of its advanced 18A fabrication process, which could significantly alter the narrative surrounding the stock. However, the path to recovery is fraught with risks, and the situation could deteriorate further before improvement is seen.
Intel’s revenue stream has faced substantial pressure, dropping from $79 billion in 2021 to $54 billion in 2023. This decline is largely due to dwindling CPU sales, triggered by a cooling PC market post-pandemic, market share losses to AMD, and the growing threat of ARM-based chipsets, known for their portability and power efficiency. The surge in demand for GPUs, crucial for AI applications, has further exacerbated the situation, as Intel’s presence in this area remains limited. Despite projections of modest growth in the PC market, Intel’s revenue outlook remains uncertain, with forecasts indicating a 3% dip this year followed by a potential 6% growth next year. Stagnation in the near term remains a possibility, given several factors, including the uncertain success of Intel’s foundry model. This strategy, which involves utilizing its manufacturing capabilities to produce chips for external clients, hinges on the successful rollout of its 18A process. While there have been some positive indicators, Intel’s past inconsistencies with advanced process nodes raise concerns.
Intel’s past struggles with manufacturing transitions, exemplified by the setbacks with its 10nm node, cast doubt on its ability to reliably produce chips for external customers at scale. The recent resignation of CEO Pat Gelsinger, the architect of the foundry pivot, further compounds these concerns, along with a shareholder lawsuit alleging misleading statements by Intel executives regarding the foundry business. These events undermine confidence in the viability of Intel’s foundry strategy. Furthermore, the CPU business faces intensified competition, not only from established rivals like AMD but also from emerging players such as ARM and Qualcomm, particularly in the burgeoning generative AI landscape. The increasing integration of AI capabilities into PCs and the shift towards accelerated computing servers utilizing fewer CPUs and more GPUs pose additional challenges for Intel’s core business.
Intel’s ability to regain momentum is further hampered by internal and external challenges. Low employee morale following layoffs and cost-cutting measures, coupled with potential customer hesitation to commit to Intel’s products and services, create a difficult environment for recovery. The prevailing perception of Intel falling behind technologically may deter both consumers and businesses from choosing its products. With consensus estimates projecting revenues of around $52 billion for this year, the possibility of a meager 2% annual growth rate to about $54 billion by 2026 looms large. This sluggish growth projection is attributed to the aforementioned challenges, including the uncertain outcome of the foundry strategy, increased competition, and the changing demands of the generative AI era.
Adding to the difficulties, Intel’s profitability has also taken a hit, with adjusted net margins declining from over 28% in 2021 to around 8.5% in 2023. This drop is attributed to declining sales, market share losses, and substantial losses within the foundry business. The potential for margins to fall further to around 5% in the near term raises serious concerns about the company’s financial health. Several factors contribute to this bleak outlook, including the costs associated with ramping up the foundry operations, potential underutilization of Intel’s manufacturing facilities due to outsourcing some production to TSMC, and the possibility of price discounting to compete in the increasingly crowded CPU market.
Considering these factors, a pessimistic scenario emerges where Intel’s stock price could plummet to $10 per share. This scenario assumes a 2% annual revenue growth between 2023 and 2026, coupled with a decline in net margins to 5%. This would translate to a 37% decline in adjusted net income from 2023 levels, potentially leading investors to assign a lower price-to-earnings multiple to the stock, further driving down its value. If the market assigns a 15x multiple based on continued underperformance, the stock price could reach $10 per share. While this scenario is projected for 2026, the timeline is less critical than the underlying factors driving the decline. If the competitive threats materialize and Intel continues to grapple with manufacturing challenges, a substantial stock correction is a distinct possibility. Despite these challenges, there remains hope for Intel’s recovery, but it requires patience from both investors and customers. The company possesses valuable expertise and operates in a growing market, suggesting that a turnaround is achievable, albeit potentially slow and requiring sustained effort and strategic adjustments.
