Intel is turning its foundry business into a subsidiary. Is it time to buy?

Brutal selling in Intel (INTC -3.04%) stock may finally run out. The stock appears to have rebounded after news that the company plans to spin off its foundry business into a subsidiary. He also expanded his business with Amazonenters into a new agreement to produce artificial intelligence (AI) chips for Amazon Web Services (AWS). This could make it a major player in the AI ​​server chip market.

However, given the stock’s performance in recent months, one might question whether this recent rally is a sign that a sustainable recovery is on the way for Intel, or whether investors should avoid the stock going forward.

Intel’s new life link

Undoubtedly, Intel fell into decline, and its attempt to return to prominence under CEO Pat Gelsinger did not go as planned. The company has made ambitious plans to spend tens of billions on new foundries to create a third-party chip manufacturing business that could compete with Taiwan Semiconductor Manufacturing (TSMC) and Samsung.

It has also made technical improvements and boldly claimed it will return to leading processes by 2025. However, planned capital spending of $25 billion to $27 billion for the next year will have a considerable impact on its balance sheet. Multiple sources also told Reuters that the chips for which Intel produced Broadcom failed that company’s tests, calling into question how well Intel can compete in that business.

The fact that Intel has suspended its dividend and is laying off more than 15% of its workforce shows that it has not met its targets. That news in August sent the stock to multi-year lows.

However, its foundry business showed potential for improvement. Intel will spin that business into a separate subsidiary, giving it its own operating board and the ability to raise separate capital. Additionally, the aforementioned deal with AWS could make Intel’s foundry business a top company in its industry.

The new investment thesis of Intel stock

Intel shares are down about 60% year-to-date before this latest rally. Against this backdrop, the investment case for Intel arguably became compelling for one key reason: valuation. However, its P/E ratio of 93 does not reflect this.

In contrast, the price-to-sales (P/S) ratio is just under 2, well below its rival’s 11 P/S ratio AMD. Undervaluation is particularly evident in a price-to-book ratio of less than 0.8. This means the market has valued Intel at more than 20% below the value of its assets minus its liabilities. This level is probably far too low for a company that remains a major chip developer and manufacturer.

At the same time, investors have many options when it comes to semiconductor stocks. As Intel lost value, stocks like AMD, Qualcommand Nvidia have provided superior market returns as they find customer bases in the AI ​​chip market. Investors must ask whether the bargain in Intel stock is worth pursuing when considering the clearer opportunities offered by Intel’s competitors.

Investment in Intel stock

Investors choosing to buy Intel stock should probably limit their exposure to small, speculative positions.

The company’s valuation makes the stock look like a compelling business, assuming it can raise more outside funding and successfully manufacture Amazon’s AI chips. However, the chip industry is in a period of significant secular growth thanks to the AI ​​trend, and many of Intel’s peers have seen sizeable increases in their stock price as its stock has declined. The setbacks in its deal with Broadcom also raise questions about whether it will be able to execute on its plans to deliver new high-end chips. That highlights the risks that come with speculating about Intel’s recovery.

Finally, Intel stock may be at the beginning of a long-awaited revival, but until the company can successfully address more of the uncertainties surrounding its business, investors should buy the stock with caution if at all.