This has been a terrible year for semiconductor stocks, as the 41% decline in the PHLX Semiconductor Sector index tells us. That isn't surprising, as weakening demand, surging inflation, and a hawkish Federal Reserve have combined to send shares of once high-flying stocks into the abyss.
Chip giant Intel (INTC +9.43%) has borne the brunt of the sell-off, losing half of its value in 2022. That's not surprising given the multiple headwinds that the chipmaker is facing, which have delivered its top and bottom lines a crushing blow. From economic headwinds to market share losses to execution issues, Intel is struggling on multiple fronts.
Chipzilla, as Intel is often called, is trying hard to regain its mojo with aggressive moves on the product development front. But will those moves be enough to inject some life into the company? Let's find out.
NASDAQ: INTC
Key Data Points
Intel is trying to get its house in order
Intel is currently gunning for a turnaround by arresting its market share losses in big markets such as personal computer (PC) processors and data center server processors. The company has been consistently losing ground to rival Advanced Micro Devices (AMD +2.05%), explaining Intel's woeful performance in the second quarter of 2022.
Intel's Q2 revenue was down 22% year-over-year, bringing in $15.3 billion on a non-GAAP basis. The chipmaker's non-GAAP operating margin also fell to 9.2%, down a whopping 25.7 percentage points year-over-year thanks in part to a decline in revenue within the data center and artificial intelligence (DCAI) business segment, but also due to the aggressive investments the company is making to improve its products. As a result, Intel's adjusted earnings shrunk to $0.29 per share in Q2, down 79% from the year-ago period.
It is also worth noting that the PC market has hit a rough patch this year as sales have declined rapidly on account of weak demand. As PC sales are expected to decline 12.8% in 2022, Intel's struggles are here to stay in the short run. That's because the client computing group (CCG) is Intel's largest business, accounting for half of its top line. The segment brought in $7.7 billion in second quarter revenue, down 25% year-over-year.
The slowdown in PC sales and the market share losses will likely continue to weigh on Intel's largest business. However, Intel is going all out to ensure that it doesn't lose any more ground to AMD with its latest Raptor Lake processors. Intel's new chips are not just promising serious performance gains over the previous generation of Alder Lake processors, but they are also priced competitively.
Intel's latest flagship processor, the Core i9-13900K, is priced at $589. The processor packs 24 cores and 32 threads, and has a maximum clock speed of up to 5.8 GHz. Meanwhile, AMD's Ryzen 7000 flagship is priced at $699 and packs 16 cores and 32 threads, but it only supports DDR5 memory. Intel's Raptor Lake processors, on the other hand, support both DDR4 and DDR5 memory types.
So a combination of affordable pricing and better memory compatibility could boost Intel's processor sales and give its CCG business a lift. But then, investors shouldn't forget the struggles of Intel's other business entities.
Intel's DCAI revenue was down 16% year-over-year in Q2 to $4.6 billion, accounting for 30% of its top line. The company's data center business has been hamstrung by delays in the launch of its new server processors, Sapphire Rapids. What's even more alarming is that Intel doesn't expect to start regaining server market share until 2025.
Should you buy this beaten-down chipmaker?
Intel is trading at a dirt-cheap valuation, which isn't surprising given the steep declines in its revenue and earnings. The stock's trailing price-to-earnings ratio stands at just six. But Intel doesn't look like a value play at this cheap multiple since a turnaround in the company's fortunes still seems a few years away.
According to Intel's estimate, its revenue will increase in the mid-to-high-single digits in 2023. From 2026, the company expects to hit annual revenue growth of 10% to 12%. The chipmaker also sees its gross margin ranging between 54% and 58% from 2025 onward, compared to a range of 51% to 53% from 2022 to 2024. Analysts, however, estimate that Intel's earnings won't be increasing for the next five years, which looks like a possibility considering the tall order it faces to turn its business around.
All this indicates that Intel stock is a falling knife that investors may want to avoid until and unless there are concrete signs of a turnaround in this semiconductor company's fortunes.
