As the world's largest producer of central processing units (CPUs) for PCs and servers, Intel (INTC -1.13%) is often considered a stable investment for conservative investors. But over the past four years, its stock has declined about 6% even as the Philadelphia Semiconductor Index more than doubled.

Manufacturing missteps, production delays, and tough competition from AMD (AMD 10.70%) all curbed Intel's growth. It also prioritized buybacks and cost-cutting measures when it should have focused on fresh investments, and a rotation of three different CEOs over the past four years raised red flags.

Should investors consider Intel to be dead money and move on to more promising chip stocks instead? Or should they still consider it to be an undervalued turnaround play at just 14 times forward earnings? Let's look at both sides of that question.

A digital illustration of a CPU.

Image source: Getty Images.

What the bears will tell you about Intel

The bears will tell you that Intel grew complacent over the years and didn't properly upgrade its own chipmaking plants. Unlike "fabless" chipmakers like AMD, which outsource its manufacturing to third-party foundries, Intel still manufactures most of its chips at its internal foundries.

As a result, Intel fell behind Taiwan Semiconductor Manufacturing (TSM 2.98%), also known as TSMC, in the "process race" to create smaller, denser, and more power-efficient chips. AMD, which used TSMC foundries, then pulled ahead of Intel in that race, with smaller and more cost-efficient CPUs. Intel's ongoing foundry problems also resulted in constant delays, which frustrated its longtime customers.

Those mistakes, which mainly occurred under former CEO Brian Krzanich's watch from 2013 to 2018, handed a big slice of the CPU market to AMD. Between the second quarters of 2016 and 2022, Intel's global share of the x86 CPU market shrank from 80.6% to 64.1%, according to PassMark Software, as AMD's rose from 19.4% to 35.6%.

After Krzanich abruptly resigned in 2018, his successor, Bob Swan, immediately focused on wasteful buybacks and cost-cutting measures instead of aggressively chasing TSMC. Swan even briefly considered following AMD's lead and becoming a fabless chipmaker before he was ousted and replaced by Intel's current CEO, Pat Gelsinger, in early 2021.

Instead of going fabless, Gelsinger doubled down on expanding and upgrading Intel's foundries to surpass TSMC in the process race by 2025. It expects that ambitious plan to boost its annual capex from $18.7 billion in 2021 to $27 billion (36% of its estimated revenue) in 2022 and for those expenses to "increase above historical levels for the next several years."

Intel expects that aggressive spending to reduce its adjusted free cash flow to negative levels this year -- so its buybacks could grind to a halt, and its dividend hikes might be suspended. If the situation gets worse, Intel could potentially eliminate its dividend altogether to save nearly $6 billion each year.

Yet, Intel will still struggle to keep pace with TSMC, which plans to boost its capex to a record range of $40 billion to $44 billion this year. Gelsinger has been desperately pleading for big government subsidies to fill that gap.

Intel still expects its adjusted revenue to rise 2% in 2022, even as it faces slowing PC sales in a post-lockdown market, but it's also bracing for a 31% drop in its adjusted earnings per share (EPS) as it ramps up its spending.

What the bulls will tell you about Intel

The bulls will acknowledge that Intel faces a lot of near-term problems, but they also believe Gelsinger's turnaround plans will pay off.

They'll point out that Intel is streamlining its business with the divestment of its NAND memory business and an upcoming initial public offering (IPO) for its automotive chip unit Mobileye. It's also quietly outsourcing the production of some of its chips (including its discrete GPUs) to TSMC to free up more capacity for the production of its higher-end CPUs. All those moves could free up billions of dollars in cash for the long-term expansion of its first-party foundries.

The bulls also believe Intel will secure government subsidies in the U.S. and Europe, where many companies have grown wary of the industry's overwhelming dependence on TSMC and Samsung for new, top-tier chips.

To address those concerns, Intel plans to open up its foundries to external customers in the future -- which could potentially pull orders away from TSMC, Samsung, and other third-party contract chipmakers. That expansion could also enable its foundries to generate a lot more revenues on their own.

Lastly, Intel is striking back at AMD with new chips, such as its new "Alder Lake" CPUs, which roughly match the performance of AMD's smaller Ryzen CPUs by consuming more power. That's not an ideal or permanent solution for countering AMD, but it could help Intel tread water for now in the PC market.

The bearish case is still stronger

Intel isn't doomed, but its stock isn't undervalued. Its low price-to-earnings ratio reflects its sluggish growth rates and murky outlook, and it will likely continue to trade at a discount until it secures more government support and shows that it can actually catch up to TSMC.

Intel's downside potential might be limited at these levels, but investors should stick with more resilient chip stocks in this challenging market.