Key Catalysts Needed to Unlock Bull Thesis for Intel

Intel (NASDAQ:INTC) shares are up over 40% since the start of this year on optimism that the turnaround plan of new leadership under CEO Pat Gelsinger is working and already yielding benefits.

The most recent earnings report was the latest catalyst for shares to continue trading higher this year, while positive roadmap updates have also supported shares of the embattled chipmaker.

Company overview

Intel is a globally renowned technology company that specializes in the design and manufacture of semiconductor chips and related technologies. With a rich history dating back to 1968, Intel has established itself as a leading force in the global semiconductor industry.

The company’s primary focus is on developing microprocessors that power a wide range of computing devices, from personal computers and laptops to data center servers and Internet of Things (IoT) devices.

The company generates revenue from the sale of its semiconductor products to original equipment manufacturers (OEMs), computer manufacturers, and other technology companies. It also provides software, services, and solutions that complement its hardware offerings. Intel operates on a global scale, with a strong presence in North America, Europe, Asia, and other regions.

Fundamental analysis

Intel stock closed at $38.77 on Tuesday and has a market capitalization of roughly $164 billion. The 52-week range for the stock is $24.73 – $40.07, which signals the stock is trading near the upper end of the range.

Intel offers a 1.29% dividend yield as it is committed to paying out a quarterly dividend of $0.13. According to data, Intel’s dividend yield is better than 63.6% companies in the semiconductor industry.

The company has a P/E ratio of 19.52 and price to sales ratio of 1.73. Intel’s gross margin stood at 42.31% (better than two third of companies in the chip sector) for the last financial year while operating margin was reported at 3.7%. Intel generated $63.05 billion in annual revenue with a net income of $8 billion.

According to the recent value metric – which takes into account historical multiples, adjustment factor based on the company’s past returns and growth, as well as future estimates – of $31.87, Intel’s stock is “modestly overvalued”.

The upside risks for Intel include clarity or a breakthrough in new products development, limited market share losses, improving product mix and gross margins, as well as key competitors (AMD) failing to deliver on their roadmap execution path.

On the other hand, weaker-than-expected trends in the PC market (which is the largest revenue generator for Intel), further delays in new product launches, new share losses to AMD, and increased competition in the data center market could continue to provide headwinds for Intel.

Competition

Intel’s primary competitor in the CPU (central processing unit) market is Advanced Micro Devices (AMD). AMD has gained significant market share and recognition for its Ryzen processors, which are known for their competitive performance and efficiency, especially in the consumer and data center segments.

Both companies design and manufacture x86 CPUs, which are widely used in desktops, laptops, servers, and other computing devices. Intel is also attempting to stage a stronger competition to the chip sector leader NVIDIA (NVDA), which is best known for its high-end graphics processing units (GPUs) that are powering data centers and AI applications.

Top Holders

Intel’s top shareholders are Vanguard Group (8.6%), BlackRock (5.1%), SSgA (4.3%), Capital Research (3.5%), Geode (2%) etc. Other notable investors include PRIMECAP, Norges Bank, Northern Trust Investments, as well as mutual funds Invesco QQQ, Washington Mutual, Fidelity 500 index, SPDR S&P 500 ETF, etc.

Stock’s underperformance

The continued market share losses have been at the core of Intel’s stock drop in recent years. For instance, Intel generated revenue of $70.8 billion 2018 before reporting $63.1 billion for 2022. From the high made in 2018 to the low in 2023, shares fell more than 55%.

The earnings per share (EPS) contraction has been one of the core reasons for Intel stock underperformance over the past 5 years. The company’s profitability suffered sharply from the continued investments in new production capacity. On the other hand, Intel was forced to slash its dividend by 66% to the lowest payout in 16 years while it did not report stock buybacks in the last quarter.

This is because Intel will spend more than 30 billion euros to develop two chip-making plants in Germany. It also committed to invest up to $30 billion in the Arizona chip factory. Hence, investors were reluctant to invest in the company that has a very high capex projection in the near term. For instance, Intel’s gross capex for the last quarter was $5.8 billion and net capex of $4.9 billion.

Can Intel finally pose a challenge to AMD?

The continued confidence in Intel’s execution of its technology roadmap, coupled with a rebound in demand for PC and server CPUs, could create the needed environment for shares to continue re-rating higher. In the meantime, Intel will continue to face strong competition, primarily from AMD, but also from non-x86 based CPU manufacturers.

Long-term investors are focused on Intel’s ability to maintain process node leadership into 2025 and beyond. Moreover, investor concerns surrounding uncertainties regarding Intel’s capacity to achieve a sustainable gross margin of 50% or higher and generate positive free cash flow are key to unlocking a bull thesis scenario in Intel stock.

Intel’s execution has also weighed on shares as the management delivered multiple setbacks in the roadmap execution. The significant improvement in execution, especially in the PC sector and the ability to drive operating margins higher, should also support shares higher.

The stock’s positive performance this year is partially due to positive roadmap updates, including the development of 5 nodes in 4 years. New Sierra server CPUs are on course to launch in 1H24 and are expected to generate significant revenue.

Another factor that could unlock new potential in Intel shares is the faster-than-expected recovery in the data center business. This could support earnings revision and continued Intel stock outperformance.

Compared to Intel, AMD’s market cap stands at $191.6 billion. The company saw its sales rise 43.6% in 2022, while Intel’s fell 20.2%. Intel hasn’t experienced a sales growth rate higher than 8.2% in the last 5 years.

On the bottom line, EPS growth at Intel is negative for two consecutive years while AMD witnessed a sharp jump in earnings in 2020 and 2021 before contracting in 2022. AMD’s EBITDA margin stood at 24.9% last year, while Intel reported EBITDA margin of 24.4%.

All-in-all, while AMD’s financial profile is clearly more robust, it also brings a higher valuation. AMD forward P/E stands at 31.06, compared to Intel’s 21.28. Price to Sales ratio for the latter is 3.01 while AMD’s is 8.58.

Conclusion

Improving datacenter sales and outlook, coupled with continued improvement in execution, are key to finally placing Intel stock on a firm footing. Shares massively underperformed in recent years as revenue and EPS declined.

However, investors’ optimism in Intel’s renewed focus on execution is already evident in YTD performance of the stock, with more to come if the company can continue to execute at a higher level.

If Intel can continue to execute at a high level, the resurging earnings and revenue growth could invite more investors to own Intel shares rather than AMD, which comes at a more expensive valuation.