Is Intel Stock a Buy Now?

Intel's (INTC 1.77%) stock jumped 11% on Oct. 28 after the chipmaker posted its third-quarter earnings report. Its revenue declined 20% year over year (and fell 15% on an adjusted basis, which excludes the ongoing divestment of its NAND business) to $15.3 billion, which matched analysts' expectations. Its adjusted earnings dropped 59% to $0.59 per share but still cleared the consensus forecast by $0.26.

For the full year, Intel expects its revenue to drop 19% to 20% (14% to 16% on an adjusted basis), compared to its prior forecast for 9% to 13% decline, as it faces "continued macroeconomic headwinds." It expects its adjusted EPS to decline 64%, compared to its previous forecast for a 58% decline.

Image source: Intel.

Those headline numbers were dismal, but investors had already tempered their expectations after AMD (AMD 1.33%), Nvidia (NVDA 3.71%), and other chipmakers warned of the PC market's slowdown in a post-pandemic market. A lot of those concerns had already caused Intel's stock to shed more than 40% of its value over the past 12 months.

Instead, investors seemed to mainly focus on Intel's planned cost-cutting measures and its recent spinoff of Mobileye (MBLY -0.71%), which raised $861 million for its former parent in its IPO. But will those streamlining strategies set a floor under Intel's plummeting stock and make it a compelling long-term investment again?

What happened to Intel?

Over the past several years, Intel struggled with chip shortages and product delays as it fell behind TSMC (TSM 2.71%) in the "process race" to manufacture smaller and denser chips. Those problems caused Intel to lose ground to AMD -- which outsourced the production of its CPUs to TSMC -- in the desktop and notebook markets. Intel also grappled with jarring management changes as it tried to resolve those issues; it's now on its third CEO in just over four years.

The pandemic still boosted Intel's sales as more consumers upgraded their PCs to work from home, attend online classes, and play higher-end games. The elevated usage of cloud-based services during that period also prompted data centers to upgrade their chips. As a result, Intel's revenue and adjusted EPS still increased 8% and 9%, respectively, in 2020.

Unfortunately, the cracks started to appear again as those tailwinds dissipated. Instead of becoming a fabless chipmaker like AMD, Intel doubled down on upgrading its plants to catch up to TSMC by 2025. As a result, its expenses started rising as its revenue growth cooled off. Its adjusted revenue grew just 2% in 2021 as its adjusted EPS increased 7%.

Those headwinds have intensified in 2022

Intel generated 53% of its revenue from its client computing group (CCG) in the third quarter. The data center and AI (DCAI) segment brought in 27% of its revenues, while another 15% came from its network and edge (NEX) group. The remaining 5% came from its other smaller businesses.

Over the past year, the CCG segment has struggled with the slowdown of the PC market. Inflation and other macroeconomic headwinds have also caused its data center customers (especially in China) to curb their spending.

Data source: Intel. YOY = Year over year.

These headwinds could persist for the foreseeable future. IDC expects global shipments of personal computing devices (PCs and tablets) to drop 10.8% this year and dip another 2.3% in 2023, while the Biden Administration's recent export ban on advanced semiconductors to China will make it even more difficult for its data center business to recover.

Reining in its spending to cope with that slowdown

But there's a silver lining: that slowdown is forcing Intel to rein in its aggressive spending plans. It reduced its full-year capex forecast to just $21 billion, compared to its prior target of $27 billion, and CEO Pat Gelsinger said the company would take "aggressive actions to reduce costs" and "optimize our headcount" during the conference call. Intel's gross and operating margins still declined year over year in the third quarter, but they improved sequentially as its spending slowed down.

Data source: Intel. Non-GAAP basis.

During the call, CFO Dave Zinsner said Intel could grow its gross margin toward 51% to 53% in the "short term" and toward the 60s over a "multiyear journey" as its operating margins rise into the 40s.

Is it the right time to buy Intel?

Intel's stock might seem cheap at 15 times this year's adjusted earnings, and it pays an attractive forward dividend yield of 5%. But it also hasn't given investors any compelling reasons to buy its stock -- its core markets are sputtering out, it still remains far behind TSMC in the process race, and cutting costs probably won't help it generate any near-term sales growth. Investors should stay away from Intel for now, especially when plenty of better semiconductor stocks are still on sale.