Intel Stock: Foundry Breakdown Could Unlock Value, We’re Bullish (NASDAQ:INTC)

It’s been a frustrating year for Intel Corporation (NASDAQ: INTC) (NEOE:INTC:CA) to investors, with the stock retracing a big rally since 2023, losing more than half its value. Weak second-quarter earnings with weak management guidance fueled market concerns about the chipmaker’s long-term future.

We covered the stock last year, highlighting a budding comeback story with shares around $25.00 at the time. Much has changed, but what has remained unchanged are some of Intel’s strengths, including leadership in chip design and significant market share in highly profitable categories.

A report suggesting the company is considering selling its chip foundry unit could be the drastic change in strategy needed to get Intel back on track. We see room to become bullish on stocks.

Why Intel Stock Crashed

When you look at Intel as a pioneer in the semiconductor industry, there are many moving parts in what has been a series of execution failures. The stock price crash has been brewing for a long time.

The company was late to address the rise of Advanced Micro Devices (AMD) as a formidable competitor in the consumer x86 CPU market over the past decade. The transition of Apple Inc. ( AAPL ) in 2020 from Intel as a supplier to its in-house chip design was also a shock to the business.

We can point to production delays and big-ticket purchases that all failed to deliver, which help explain the company’s apparent fall from grace.

Perhaps the biggest miscalculation was the lack of vision to recognize the revolutionary potential of artificial intelligence. In this case, NVIDIA Corp. (NVDA) took off with a multi-year lead on AI-optimized chips that changed the technology game. What we have now is a downed latecomer trying to play catch up.

A reset of expectations

This theme of setbacks continued into 2024. In Q2, Intel reported adjusted EPS of $0.02, below estimates of $0.08 and also down from $0.13 in the year-ago quarter. The big miss here captured lower-than-expected revenue of $12.8 billion, down 1% year over year, weighed down by weakness in the traditional data center CPU market as the industry shifts spending to AI chips.

Most of the revenue weakness is related to the Intel Foundry segment, where Intel continues to ramp up its newest facilities in Ireland, responsible for significant R&D and start-up costs that the company expects to continue through 2025. Company-wide operating margin of just 0.2% fell from 3.5% in Q2 2023.

Citing disappointing results and an admission that the company is too bloated, Intel plans to launch further cost cuts, targeting more than $10 billion in savings by next year.

This includes a 20% reduction from previously planned capital expenditure, as well as reductions in operating expenses through a 15% or greater reduction in staff, while realigning priorities in high-value growth areas. The immediate implication is that a divestment may limit long-term growth prospects, but support free cash flow and profitability in the short term. Intel is also suspending its dividend starting in the fourth quarter.

Overall, the combination of a first half of 2024 that did not live up to the optimism built from last year’s 2023 and the fallout from new restructuring initiatives resulted in a reset of expectations evident from the latest lower stock stage. price.

Focusing on strengths

Beyond the doom and gloom headlines, several strengths in Intel’s product portfolio work to dispel any concerns that the company is falling apart. The big picture is that Intel has had some missteps, but remains fundamentally sound.

In Q2, Client Computing Group (CCG) generated revenue of $7.4 billion, beating expectations by 9% y/y. Intel’s biggest and most profitable business is on track to ship more than 40 million “AI PCs” by the end of the year, surpassing expectations for the latest generation of processors equipped for AI performance. The Lunar Lake processor series was released ahead of schedule and was noted for its leap in performance efficiency

The enterprise Data Center and AI (DCAI) unit saw a modest 3% decline in revenue this quarter, although there is some anticipation that new product launches may lead to a broader rebound in the future.

The Intel Sierra Forest Xeon 6 processor is scheduled to begin shipping in September as a high-performance process for a general computing data center. Separately, Intel’s attempt to directly compete with Nvidia is on the horizon, with the Gaudi 3 AI accelerator still coming this year. Management cites “twice the performance per dollar” as a major advantage in specialized AI workloads such as deep learning and machine learning.

DCAI remains strategically important to Intel’s growth potential, along with its Network and Edge (NEX) unit. Management explains that excluding some stock volatility related to major telecom customers this year, growth in the first half was 10%.

The pattern that emerges is this contrast between a still dynamic product division and the foundry unit that was a proverbial money pit dragging the firm down. The situation is not great, but there is an underlying value.

What’s next for Intel?

When we look at Intel stock as an investment opportunity today, the bear case will be stronger, centered on a narrative that the company has lost the AI ​​arms race and the foundry business is a sinking ship.

At the same time, there’s a case where many of those negatives have already been priced in, especially after the stock is down 25% in the past month alone.

Note that Intel still generated $8.2 billion in free cash flow last quarter, while reporting $11.3 billion in cash on the balance sheet. The dividend suspension is set to save the company $2 billion in cash next year, providing some additional flexibility to deal with a $48 billion debt position. An optimistic case for INTC starts with the company’s ability to turn things around.

Ultimately, a scenario where Intel sells or spins off the foundry business could be the best course of action to put the core product groups on a path to sustainable and profitable growth.

According to reports, Intel is working with banks like Morgan Stanley ( MS ) and Goldman Sachs ( GS ) on various strategic options. While nothing has been officially confirmed, this level of restructuring would address what has been the weakest part of the business and likely strengthen the balance sheet, unlocking value for shareholders.

The move would also bring CGC, DCAI and NEX groups in line with the model that is proving to work with competitors such as AMD and Nvidia, which have consistently generated higher margins and profitability.

INTC Share Price Outlook

Recognizing the highly uncertain and speculative situation, we rate INTC as a buy. The call here is that a combination of reset expectations coupled with underlying strengths and room for an improved outlook could be enough to mark the start of a new stock rally, with $30.00 a reasonable upside target for the year ahead .

In terms of valuation, the key point is that Intel remains profitable and generates positive free cash flow, which is expected to accelerate even through 2025. Assuming the company stays the course without a breakup or sale of the foundry, the current consensus is that EPS to accelerate to $1.22 by next year, implying 18x 1-year P/E ratio. This level could turn out to be a bargain if the recovery strategy works with rebound growth in the coming quarters.

Hedging downside risks, it is also possible for conditions to deteriorate. Signs that AI initiatives are failing to gain market adoption, or some sort of technical setback where expected product launches are delayed, would undermine an optimistic outlook. Intel also remains exposed to changing macroeconomic conditions, where weaker trends in regions such as Asia-Pacific or a deeper slowdown in traditional data center demand could also put pressure on the stock.