Is It Too Late to Buy Intel Stock?

Intel (INTC -0.38%) was once considered a reliable blue chip stalwart for long-term investors. As the world's largest producer of PC and data center CPUs, Intel had a strong brand, a captive market, and a wide moat.

It remained resilient throughout previous economic downturns, and it generated plenty of cash to cover its share buybacks and dividends. But today, Intel's stock hovers near its 52-week low and trades at just 12 times forward earnings. That decline has boosted its forward dividend yield to 3.5%.

Has Intel become an undervalued income play at these levels, or is it too late to buy its beaten-down shares? Let's review the company's latest challenges and its ongoing turnaround efforts to decide.

Image source: Getty Images.

Why did Intel lose its momentum?

Intel's stock tumbled more than 30% over the past 12 months for three main reasons. First, its first-party foundries had fallen far behind Taiwan Semiconductor Manufacturing Company (TSM 2.84%), or TSMC, in the "process race" to manufacture smaller and denser chips. As a result, rival AMD (AMD 2.44%), which outsources its manufacturing to TSMC, consistently delivered more power-efficient chips over the past few years.

As Intel struggled to catch up to TSMC, it stumbled with ongoing chip shortages and production delays at its own foundries. As a result, a growing number of frustrated PC and data center customers started to use AMD's Ryzen PC and Epyc server CPUs instead. Here's how rapidly Intel's shares of the desktop, laptop, and server CPU markets deteriorated over the past five years:

Data source: PassMark Software.

Second, Intel CEO Pat Gelsinger, who took the helm last February, resisted calls to transform the company into a "fabless" chipmaker -- or one that would outsource all of its production to third-party foundries, like AMD. Instead, Gelsinger doubled down on upgrading and expanding Intel's plants in an ambitious bid to reclaim the process lead from TSMC by 2025.

That capital-intensive strategy, which will require Intel to raise its annual capex from $18.7 billion in 2021 to $27 billion (36% of its projected revenue) in 2022, would still fall short of TSMC's capex target of $40 billion to $44 billion this year. Gelsinger is counting on government subsidies in the U.S. and Europe to fill that wide gap, but TSMC will also probably receive some of those subsidies.

And third, the PC market has been cooling off in a post-lockdown market as fewer people buy new systems for remote work and video games. The ongoing chip shortages, which broadly affect other PC components, and supply chain headwinds have been exacerbating that pain.

In short, Intel faces slower growth and elevated spending for the foreseeable future, which makes it an unappealing stock in this challenging market. In 2022, it expects its adjusted revenue to rise less than 2% and for its adjusted earnings per share (EPS) to tumble 34%.

How can Intel regain its momentum?

The next three years will inevitably be difficult for Intel, but the chipmaker still has plenty of ways to stabilize its long-term growth.

To streamline its business, it's in the process of selling its NAND memory chip business, which is more exposed to cyclical headwinds, to South Korean chipmaker SK Hynix. It plans to spin off its automotive chipmaking unit, Mobileye, which it acquired in 2017, in an initial public offering later this year.

Intel also hasn't repurchased any shares since the first quarter of 2021. That's a major reversal of Intel's strategy under Gelsinger's predecessor, Bob Swan, who was frequently criticized for plowing too much cash into big buybacks instead of R&D and manufacturing initiatives. That tighter financial discipline should free up more cash for Intel's accelerated expansion plans.

The chipmaker's recent expansion into the discrete GPU market, which is currently dominated by Nvidia and AMD, shouldn't be dismissed. It can afford to bundle its GPUs with its new CPUs, or sell them as loss-leading chips, to gradually gain a foothold in that saturated market. That project also won't apply additional pressure on its own foundries, since it's ironically outsourcing the production of its discrete GPUs to TSMC.

And Intel's decision to open up its plants to other chipmakers, which would partly turn it into a third-party foundry, could eventually generate fresh revenue by pulling orders for lower-end chips away from TSMC, Samsung, UMC, and other leading contract chipmakers. Therefore, the bulls will probably claim Intel's business is merely transforming instead of dying.

Is Intel's stock still worth buying?

Intel's low valuation and high yield might limit its downside potential, but there are plenty of better blue chip dividend stocks to buy right now. Gelsinger seems optimistic about Intel, but it's still too early to tell if it can actually catch up to TSMC in the process race and prevent AMD from gaining more ground across the PC and server CPU markets. So for now, Intel deserves to stay near its 52-week low.