The downside to $10 Intel stock?

Intel stock is down about 60% this year, due to several issues, including the loss of market share to rival AMD in both the PC and server space, as well as the industry’s broader transition from CPUs to GPUs in the generative AI era, in addition to significant manufacturing defects. Now, we think Intel stock is undervalued after the sale, with our reasonable estimate of the stock coming in at $27 per share. stock, nearly 30% ahead of the current market price due to the company’s low valuation, potential regulatory benefits under Trump and the impending rollout of its next-generation 18A manufacturing process, which could turn the narrative on the stock. (See our analysis of Intel’s valuation : Expensive or cheap?) There are risks, though, and there’s still a decent chance things could get worse before they get better. In fact, Intel stock is down about 20% over the past month alone. In this analysis, we highlight how Intel stock could fall around 50% from current levels to around $10 per share. Separately, a lowered Fed outlook for the number of rate cuts has also affected other areas of the market. See Can Fed Pessimism Send Bitcoin Below $80,000?

There is no guarantee of an increase in income

Intel’s revenue fell from $79 billion in 2021 to $54 billion in 2023 as CPU sales fell due to the cooling of the PC market following Covid-19 and also due to market share gains by rival AMD and threats from ARM-based chipsets, which are more portable and power saving compared to Intel’s x86 chips. That surge in demand for GPU chips for AI applications — an area where Intel has a relatively limited presence — has also hurt. While the PC market is recovering and sales are expected to grow in the low single digits this year, Intel’s revenue doesn’t appear to be seeing a meaningful recovery yet, with consensus estimates predicting a 3% drop in sales this year , while it is estimated at 6%. growth next year. There is still a possibility that Intel could see its revenue stagnate in the meantime due to a few factors. Separately, if you want upside with a smoother ride than an individual stock, consider High quality portfolio, which has outperformed the S&P and had >91% returns since inception.

Why?

Intel is banking heavily on the foundry model — essentially using its manufacturing capabilities to make chips for outside customers — to turn its business around. However, there is no guarantee that this will pay off. The company’s latest 18A process, its most advanced production technology to date, is the cornerstone of the company’s foundry business, and there have been some positive developments of late. (See Is Intel Foundry Ready for a Comeback?) That said, Intel’s performance in terms of internal execution is cause for concern. Intel’s recent moves to high-end processing nodes have been rather inconsistent. For example, the 10nm node faced significant yield and production setbacks a few years ago. Similar challenges can arise with the 18A process. These difficulties even forced Intel to outsource part of the manufacturing of its newer chips to Taiwan’s TSMC. Given Intel’s struggles manufacturing its chips, it’s fair to question whether it can be reliably counted on to produce chips for others at scale. Earlier this month, Intel announced that CEO Pat Gelsinger, who was the architect behind the foundry, would step down from the company. Separately, shareholders also filed a lawsuit last week alleging that Intel’s top executives made false and misleading statements that their foundry business violated federal securities laws. This development may not inspire confidence in the foundry business. See also Palantir stock went 4.5x this year: Time to rethink?

Intel’s CPU business may face further pressure. While AMD has gained market share in both the data center and PC markets, more competition may be on the way. The generative AI era could open the door to more competition as PC makers look to incorporate more AI smarts into their devices. For example, both chip designer ARM and mobile chipset specialist Qualcomm are pushing into the PC space, and Microsoft’s latest Copilot+ PCs use ARM chips that offer AI capabilities and consume less power. There can be challenges on the server front, as accelerated computing servers used for generative AI applications typically require only one CPU to eight or more GPUs in AI servers. Furthermore, GPU manufacturers such as Nvidia are playing a larger role in overall server system design, looking to replace CPUs from e.g. Intel with lower ARM chips instead of Intel’s. This could affect Intel’s bread-and-butter business.

Intel is clearly on the back foot. Although the company is keen to build momentum, there are challenges here. Employee morale is unlikely to be too high after a series of layoffs and cost-cutting initiatives. Customers and buyers could also reconsider committing to Intel’s products and services. Consumers want the ‘best’ and if they believe that Intel is not the future – it is less likely to be the choice of customers today. Everything just gets a little harder. Intel’s revenue is projected to be around $52 billion for this year per consensus estimate, and there is a possibility that sales could grow at a level of only about 2% per year to about $54 billion by 2026 due to the above factors.

Intel’s margins may contract further

Intel’s adjusted net margins (net income, or profit after expenses and taxes, calculated as a percentage of revenue) have been on a downward trajectory – falling from levels above 28% in 2021 (and in the years before that) to around 11% in 2022 mid in declining sales and loss of market share. Adjusted net margins fell to just around 8.5% in 2023 due to further sales declines and significant losses in the foundry business. There remains a possibility that margins could fall to around 5% in the near term.

Why?

Costs associated with the foundry’s ramp-up could hurt Intel’s bottom line. For example, it may take time to achieve good production yields with the new 18A process. Furthermore, Intel’s move to outsource the production of its Arrow Lake chip to TSMC could potentially reduce the utilization of its own manufacturing facilities in the short term. Intel hasn’t exactly been known for manufacturing efficiency either. For perspective, in 2023 Intel’s foundry business reported an operating loss of $7 billion on sales of $18.9 billion, and the company is expected to see revenues contract this year while remaining loss-making. Separately, higher competition in the CPU space — where there are new entrants like Qualcomm and ARM — may prompt Intel to resort to some level of discounting, affecting its margins.

How does this affect Intel’s valuation?

Now at the current market price of about $20 per per share, Intel trades at about 19x 2023 earnings and about 20x estimated 2025 earnings. The company is expected to make a loss in 2024. If we combine the scenario we described above – which assumes an average growth of only about 2% annual revenue between 2023 and 2026 with margins falling to about 5% – this means that adjusted net income could decrease from about $4.4 billion in 2023 ($1.05 per share) to about $2.75 billion in 2026 ($0.66), down 37% compared to 2023. Bad times make it easier to imagine worse times – and when they do, things can spiral, prompting investors to assign an even lower multiple to Intel, reassessing Intel’s recovery path. For example, if Intel’s investors award a multiple of 15x after its continued underperformance, this will translate into a share price of around $10 per share.

What about the time horizon for this negative return scenario? Although our example illustrates this for a 2026 timeline, in practice it won’t make much difference whether it takes two years or four. If the competitive threat plays out, with Intel also continuing to struggle with production, there is the potential for a meaningful correction in the stock.

The decline in INTC stock over the past 4-year period has been far from consistent, with annual returns significantly more volatile than the S&P 500. The stock returned 6% in 2021, -47% in 2022 and 95% in 2023 On the other hand, Trefis High quality portfoliowith a collection of 30 stocks, is significantly less volatile. And it has outperformed the S&P 500 every year in the same period. Why is that? As a group, HQ Portfolio shares outperformed the benchmark index with less risk; less of a roller coaster ride as it turns out HQ Portfolio performance metrics.

Having said all that, we think it pays to be patient – and patient investors and customers will be rewarded. We emphasize catalysts for Intel stock recovery in this analysis. This is a large company with a glorious past and valuable know-how in a growing market. Our analysis suggests that victory is at hand – it just may not be quick and may require patience.

Invest with Trefis Market Beating Portfolios

See all Trefis Price estimate