On January 2021, Intel (INTC 0.64%) elevated Pat Gelsinger to become the new chief executive officer after the company's board ousted the previous CEO, Bob Swan, due to many botched decisions and manufacturing setbacks. Between the chip industry sinking into a cyclical downturn and competitors eating away at its market share, Intel had a disastrous 2022. However, investors now hope the new CEO can restore the company to its former glory.
With its stock recently plunging to 52-week lows, should you wager on this company bouncing back? Let's investigate.
Why investors sold Intel stock
Investors have soured on the stock, as Intel's two most significant revenue-generating segments, the client computing group (CCG) and datacenter and AI group (DCAI), have deteriorated significantly in 2022.
CCG is primarily Intel's personal-computer business. And since the demand for PCs dropped like a rock after the pandemic boom, the CCG business has imploded.
Meanwhile, the businesses that make up the DCAI segment -- the Xeon server processor, and field programmable gate array (FPGA) products -- have declined. Because Intel's management fumbled the ball the last several years, Advanced Micro Devices caught up; AMD is now eating Intel's lunch in the data center space, and gaining market share.
In the third-quarter earnings report, CCG declined 17% from the previous year's comparable period to $8.1 billion, and DCAI dropped 27% to $4.2 billion. Additionally, consolidated gross margin has shrunk from 56% in the third quarter of 2021 to only 42.6% in the third quarter of 2022. Worse, operating margin showed a loss of 1.1% -- a terrible result.
Wall Street responded to the business falling off a cliff by dropping Intel's stock. In fact, Intel's stock declined 50% in 2022, putting it near its lowest price-to-sales valuation in the last ten years.
Why investors should strongly consider buying Intel
Gelsinger has a strong plan dubbed "IDM 2.0" (a new version of Intel's "integrated device manufacturing" model). While it might take some time to play out entirely, and the road may be rocky, his scheme aims to make Intel a best-in-class semiconductor company able to achieve gross margins above 60% and operating margins over 40%.
IDM 2.0 combines three endeavors:
- Manufacturing most of Intel's semiconductor products within the company.
- Building out a substantial semiconductor-manufacturing contract business for companies in the U.S. and Europe.
- Using more third-party foundries to build some of its products.
Intel's objectives align with the U.S. government's goal to bring a significant chunk of chip manufacturing capacity back to America.
In August, President Joe Biden signed the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022, otherwise known as the CHIPS Act. This legislation provides $39 billion in manufacturing subsidies to construct semiconductor fabrication plants (fabs) and an additional $24 billion in tax credits for companies engaged in domestic chip production. It should significantly aid Intel in building a vast $20 billion fab in Ohio that the company plans to turn into the largest in the world.
Intel's goal is to become the No. 2 contract chipmaker worldwide by the end of the decade -- an ambitious goal since it only started its contract operation in 2021. According to TrendForce, the current No. 2 is Samsung, which had a 15.5% market share at the end of the third quarter of 2022. Should it surpass Samsung's current market share, Intel could bring in $15 billion to $20 billion annually from this new business by 2030.
Don't expect a quick bounce back
Should you choose to invest in Intel, be aware that industry experts expect the semiconductor downturn to continue throughout 2023. For instance, market researcher Gartner projects global semiconductor revenue growth to decline by 3.6% this year. Additionally, Intel's plans require almost perfect execution, and it's bound to encounter problems.
However, this company pays you to wait. The stock now has a juicy dividend yield of 5.57%. And after several years of Intel stalling and ceding its technology lead to Taiwan Semiconductor Manufacturing and AMD, 2022 should be the low point for its technological ineptitude. Gelsinger said on the Q3 earnings call that he believes the company is now on track to regain transistor performance leadership by 2025.
If you've read Pat Gelsinger's biography on Intel's website, you may have confidence that his industry knowledge and experience can take the company back to the top of the semiconductor industry. Considering Intel's low valuation, now is a great time to buy the stock for the long term.
