Shares of Intel (INTC +0.85%) have underperformed the broader stock market by a big margin over the past three years thanks to the loss of its manufacturing lead to rival foundries, but the company's long-term guidance indicates that a turnaround may be in the cards.
NASDAQ: INTC
Key Data Points
Though Wall Street didn't seem convinced about Intel's bullish long-term forecast issued at the company's latest investor meeting held on Feb. 17, a closer look indicates that the market may be underestimating Chipzilla's capability to turn its business around. After all, Intel has shown signs that it could regain its mojo by building pressure on rivals such as Advanced Micro Devices.
Let's look at the reasons it would be a bad idea to discount Intel's turnaround prospects.
Image source: Intel.
Intel investors should focus on the bigger picture
Investors weren't happy with Intel's 2022 forecast, which explains the 5% drop in the company's share price following its investor meeting. The company has guided for $3.50 per share in earnings for this year on revenue of $76 billion. For comparison, Intel had generated $5.47 per share in adjusted earnings on $74.7 billion in revenue last year.
The company's gross margin is expected to shrink to 52% this year from last year's level of 57.7%. Additionally, Intel estimates a negative free cash flow of $1 billion to $2 billion this year. Not surprisingly, investors pressed the panic button looking at the 2022 forecast as its earnings are on track to drop big time this year.
However, investors shouldn't forget that Intel has set aside $27 billion as its net capital spending budget for 2022. That would be a huge increase over Intel's 2021 capital expenditure of $18.7 billion and nearly double the $14.3 billion capital spending figure in 2020. Intel is doing the right thing by bumping up its capital expenditure significantly this year given the developments at rivals such as Taiwan Semiconductor Manufacturing, popularly known as TSMC.
The Taiwanese foundry giant has raised its 2022 capital expenditure forecast to a range of $40 billion to $44 billion, a jump of 40% at the midpoint of the guidance. So, it was important for Intel to come up with an aggressive spending plan to accelerate its product roadmap. That's exactly what Intel management believes that it is on track to do.
Intel's Alder Lake processors have already made an impression in the market by taking the gaming crown away from AMD, and Intel plans to keep up the pressure on its rival with the Raptor Lake processors this year. Intel estimates that the Raptor Lake processors could deliver a double-digit performance gain over the current Alder Lake processors as they will be packing more performance and energy cores.
The Raptor Lake processors will be followed by the Meteor Lake and Arrow Lake processors in 2023 and 2024. Based on the Intel 4 process, Meteor Lake is expected to start shipping in 2023 and help the chip giant go toe to toe with AMD's Zen 4 architecture that's expected to land later this year. It is worth noting that Zen 4 is based on a 5-nanometer (nm) manufacturing process, while the Intel 4 process is based on a 7nm manufacturing node.
However, Intel's chips have superior processor density, which would make its 7nm chips superior to AMD's 5nm offerings on paper. So, Intel's aggressive spending plan is likely to aid its turnaround and crush AMD's resurgence in the CPU market from 2023. This explains why Intel is confident of an improvement in its financial performance from next year.
Things are about to get better
Intel management estimates that its revenue could increase in the mid- to high-single digits in 2023 and 2024, while gross margin is expected to remain between 51% and 53%. The company expects operating expenses to range between 28% and 30% during this period as it tries to regain its process lead.
Intel forecasts that its growth will kick into a higher gear in 2025 and 2026, with revenue growth in the range of 10% to 12% and a gross margin level of 54% to 58%. Operating expenses are also expected to come down to a range of 25% to 27%. So, Intel could reward patient investors with solid upside in the long run.
As it turns out, Intel carries an analyst-averaged price target of $70, which would translate into a 55% upside from current levels. The semiconductor giant could hit that target if it can execute on its roadmap, which is why the stock looks like a good bet right now as it is trading at just 9.2 times trailing earnings -- a multiple that may seem very attractive once it steps on the gas.
