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Semiconductor stocks remain in focus, as the pivot to artificial intelligence (AI) has fueled the demand for chips, and Nvidia (NVDA) has become a $2 trillion giant riding the AI wave. NVDA, which was the best-performing S&P 500 Index ($SPX) constituent last year, is holding up as the index's second-best performer so far in 2024.
On the other side of the spectrum is Intel (INTC), which is the worst-performing S&P 500 stock, sporting YTD losses of 40.3%. Intel’s underperformance is not limited to 2024 alone; the stock has lost almost a third of its market cap over the last five years.
Moreover, Intel stock is up by all of about 8% over the last two decades, in absolute terms - making it among the biggest wealth destroyers during the period, even after accounting for its dividend.
Intel Stock Is a Long-Term Underperformer
Intel has missed many buses over the years, including the smartphone (and iPhone) revolution. More recently, Intel - like other chip companies - lost out to Nvidia, which capitalized on the AI boom.
Nvidia’s revenues in the current fiscal year are expected to be over 10 times what it generated in fiscal year 2020. On the other hand, Intel is expected to post revenues of $62.7 billion in the current year, which - despite being 12.4% higher than the previous year - is significantly below the $77.8 billion it generated in 2020.
Pat Gelsinger’s IDM 2.0 Transformation
Intel brought back Pat Gelsinger as CEO in early 2021, who soon outlined his “IDM 2.0” transformation strategy to resurrect the once-formidable chip company. Among others, Intel doubled down on innovation and announced that it would also start making chips for other companies and build new fab units.
The stars seemed to be aligning for the foundry business as Intel secured billions of dollars in funding under the CHIPS Act. Given the strategic importance of chips – which became even more apparent during the COVID-19 supply chain crisis – countries globally are looking to manufacture these critical components domestically, and the U.S. is no exception.
Intel’s Business Strategy
Intel’s business strategy appears to be three-fold. It is working on advanced chips, including those with AI capabilities, to drive the sales of its Intel Products segment. Specifically, it has launched its Gaudi 3, which it says could “deliver on average 50% faster inference and 40% greater inference power efficiency than Nvidia H100 on leading generative AI (GenAI) models.”
For its foundry business, which produces chips for the company as well as third parties, the strategy is to onboard more customers to drive operating leverage through increased production. During the Q1 earnings call, Gelsinger said, “We have clear line of sight to becoming the largest system foundry for the AI era and the second largest overall by 2030.”
Finally, in its All Other segment, it is looking to unlock value. The company has already listed its Mobileye (MBLY) self-driving unit, and is looking at an IPO of Altera, as well.
During the Q1 earnings call, Gelsinger reiterated that the transformation is a multi-year plan that needs large investments upfront. These investments have hampered Intel’s margins, as well as its cash flows, in the short term.
The company’s guidance has also trailed estimates for the last two quarters, which is only adding to the pessimism - and has been among the key reasons behind the stock’s 2024 underperformance.
Has INTC Stock Bottomed?
During the Q1 earnings call, Gelsinger stressed that Q1 was the bottom for the company, and said Intel should report sequential revenue growth in the coming quarters this year as well as in 2025.
He listed commercial PC refresh, demand for AI PCs, a recovery in the data center business, and “cyclical recoveries” in Mobileye, Altera, and NEX as catalysts to drive growth in the coming quarters.
Intel Stock Forecast
Analysts are not sold on Gelsinger’s transformation plan, though – or at least, that’s what their ratings on INTC stock tell us. Of the 35 analysts covering Intel stock, only 6 rate it as either a “Strong Buy” or “Moderate Buy,” while 25 rate it as a “Hold” or some equivalent. The remaining 4 rate INTC as a “Strong Sell.”
One silver lining in analysts’ ratings is Intel’s mean target price of $40.29, which is 34% higher than yesterday’s closing prices. By comparison, Nvidia’s mean target price of $955.78 is just 5.7% higher than yesterday’s closing prices.
That said, Nvidia is set to report its earnings later this month, after which analysts might raise the stock’s target price – as they have done following the last several earnings calls. Analysts have generally found themselves playing catchup with Nvidia’s price action, as the stock seems to run ahead too fast and too soon.
Also, I won’t put Nvidia and Intel in the same league, as the Jensen Huang-led company is way ahead with its AI chips. Intel, for instance, expects Gaudi 3 to generate sales of $500 million in the back half of the year, which is a tiny fraction of the billions of dollars in revenues Nvidia is raking in from sales of AI chips.
Is Intel Stock Cheap at These Levels?
Valuing Intel is also a bit tricky here, as its earnings are currently subdued due to ongoing investments in its transformation, which is distorting the multiples. Its next 12-month (NTM) price-to-earnings multiple stands at 24.2x, which is significantly higher than historical averages and is reflective of the current depressed earnings. Intel’s NTM price-to-sales multiple is 2.25x, however, which is below the five-year average of 2.88x.
I find Intel stock somewhat cheap (but not mouthwatering) here, and see it as a transformation play. To be sure, corporate transformations are a much-abused word, and are far from easy. However, despite Intel’s perennial underperformance, I won't give up on the stock yet, and believe the worst could be over.
If Q1 was indeed the bottom for revenue growth, as management highlighted during its Q1 earnings call, Intel could see better days ahead and reverse some of its YTD underperformance.
On the date of publication, Mohit Oberoi had a position in: INTC , NVDA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
