Intel Corporation (NASDAQ:INTC), one of the leading chipmakers in the world, has made steady progress with its turnaround strategy since the appointment of Pat Gelsinger as CEO in February 2021. However, the company may never be the same way it once was as it grapples with persistent production challenges and the increasing threat of competitors.
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Although Intel is still the leading chipmaker for central processing units used in personal computers, the company has lost its appeal in many fast-growing sectors, including cloud computing and AI. Therefore, I am neutral on the prospects for Intel, and I believe there is no margin of safety to invest in the company today.
Let’s talk about some of the positives about Intel before getting into the negatives.
Turnaround Strategy is Gaining Traction
Intel’s turnaround strategy focuses on several important business aspects. These include reducing costs to improve operating efficiency, reorganizing the business to separate the Foundry business from the Semiconductor Design business, and establishing a smart capital strategy to allocate funds efficiently and effectively to create shareholder wealth.
Intel has made progress on all these fronts in the last couple of years, although Intel’s stock price has halved from around $68 to $34 since Pat Gelsinger was appointed CEO.
Intel started losing market share to competitors such as Advanced Micro Devices (NASDAQ:AMD) a few years ago due to production delays of new processors, including the highly anticipated 10nm processor. The company, however, has made steady progress in the recent past by formulating a strategy to regain manufacturing leadership with a new product roadmap consisting of Intel 7, Intel 4, Intel 20A, and Intel 18A process nodes.
According to the company, Intel 18A, which is expected to be launched before the end of 2024, will help the company once again compete with Taiwan Semiconductor Manufacturing Company (NYSE:TSM).
A couple of weeks ago, CEO Pat Gelsinger revealed that a future foundry customer had placed a large order for 18A process nodes, giving reason to believe the company is once again gaining the trust of important customers. Over the past couple of years, the company prudently allocated capital to expand its foundry capacity to avoid production delays, and these investments are likely to pay off in the coming years if Intel secures a few big foundry customers with its 18A technology.
Intel has made progress on the cost-cutting front as well. The company has an ambitious plan to reduce costs by as much as $10 billion by 2025. To achieve this objective, Intel has so far reduced its headcount and exited several non-core businesses, including Barefoot Networks.
The biggest move that will help Intel’s cost-cutting measures is the reorganization of its manufacturing business to treat it as a stand-alone unit starting from the first quarter of 2024. Since the manufacturing business will interact with other business units as a standalone foundry, the company will be able to save at least $1 billion from the reduction in expedited wafers alone.
The early positive signs seen from the foundry business and on the cost-saving front are likely to boost investor confidence in Intel in 2024 as the company gains more traction on these fronts.
Intel is at the Right End of Policy Decisions
More often than not, investors have to deal with companies being penalized by policymakers. Intel, however, has found itself at the right end of policy decisions, with the company expected to play a major role in the Biden Administration’s efforts to bring supply chains back home.
Through the CHIPS and Science Act, which aims to distribute $52.7 billion among chipmakers to move their supply-chain operations back into the U.S., Intel will receive anywhere between $2.5 billion and $7.5 billion to build its Arizona and Ohio fab projects.
Although government funding will come with certain requirements, being on the right side of policymakers is always an encouraging sign. With the Biden Administration continuing to focus on creating jobs and surpassing China’s superior chip manufacturing technology, Intel is likely to benefit from favorable policy decisions in the foreseeable future.
The Caveat: Poor Financial Performance
Although Intel is moving in the right direction, the company is not out of the woods yet, which is evident from its lackluster financial performance in recent quarters. Since the first quarter of 2021, which coincides with the appointment of Pat Gelsinger as CEO, Intel has reported year-over-year revenue declines in each quarter except for the third and fourth quarters of 2021. More recently, revenue losses have extended to double digits, highlighting the rough patch Intel has found itself in.
From a technological perspective, it is too early to determine whether Intel will be able to regain some lost ground in the coming years. Because of this, investors will have to seek a wide margin of safety to invest in the company.
Is Intel Stock a Buy, According to Wall Street Analysts?
Based on the ratings of 32 Wall Street analysts, Intel has a Hold consensus rating, and the average Intel stock price target is $36.23, implying upside potential of just 6% from the current market price.
Intel, at its innovation day event held on September 20, showcased a product roadmap that aims to capture the opportunities available in the AI spectrum. Wall Street analysts, however, did not meaningfully adjust their price targets following this event.
Morgan Stanley analyst Joseph Moore maintained his price target at $35, citing that the innovation event lacked major surprises. Wells Fargo analyst Aaron Rakers, who has a price target of $40 for Intel, concluded that the company’s product roadmap is on track to meet expectations.
The Takeaway: Intel Looks Fairly Valued
Intel is making progress with its turnaround strategy, but the company seems fairly valued today when considering analysts’ price targets, leaving investors no margin of safety. A lot can still go wrong for Intel, which makes investing in Intel a risky bet today at a forward price-to-earnings multiple of more than 55. Patiently waiting for a better opportunity to invest in the chip giant seems like the rational choice today.
