Where Will Intel Stock Be in 1 Year?

Intel's (INTC -9.20%) stock rallied nearly 7% on July 28 after the chipmaker posted its second-quarter earnings report. Its revenue declined 15% year over year to $12.9 billion, which still exceeded analysts' expectations by $760 million. Its adjusted earnings per share (EPS) fell 54% to an adjusted $0.13 whereas analysts had forecast a loss of $0.03.

Intel's sales and profits are still shrinking, but some signs of a cyclical turnaround are finally appearing. Let's look at those green shoots and see if they suggest that Intel's stock can head higher over the next 12 months.

Image source: Getty Images.

Is the cyclical downturn almost over?

Intel generated 53% of its revenue from its client-computing group (CCG) in Q2. That core business mainly produces its x86 central processing units (CPUs) for PCs, and its sales have shriveled year over year for eight consecutive quarters as the market's demand for new PCs -- which spiked during the pandemic -- cooled off in a post-pandemic world.

Another 31% of Intel's revenue came from its data center and artificial intelligence (DCAI) group, which sells its high-end Xeon CPUs and programmable chips for data centers. That segment's revenue also declined year over year for five consecutive quarters as the macro headwinds forced large organizations to rein in their spending on big data center upgrades.

Intel's network and edge (NEX) group, which provides networking products and edge computing chips, brought in 11% of all revenue. That segment also lost its momentum over the past two quarters as the macro challenges intensified. The remaining 5% of Intel's revenue came from its stake in the automotive chipmaker Mobileye (MBLY -5.50%), which it partially spun off in an initial public offering (IPO) last October, and its foundry division. As seen in the table below, the persistent declines across its CCG, DCAI, and NEX divisions caused Intel's revenue to decline year over year for six consecutive quarters.

Data source: Intel. YOY = Year over year.

But on a quarter-over-quarter basis, Intel's CCG revenue rose 17%, its DCAI revenue grew 8%, and its NEX revenue dipped 7% in Q2. That marks a significant improvement from Q1 when all three segments posted sequential-revenue declines. Intel's total revenue also grew 10% sequentially.

Intel expects to generate $12.9 billion to $13.9 billion in revenue in Q3. That would represent as much as 8% sequential growth, but a 9% to 16% decline from a year earlier.

During the conference call, Chief Executive Officer Pat Gelsinger predicted the CCG unit would experience a "sustained recovery in the second half of the year" with the normalization of PC chip inventories, its upcoming launch of Meteor Lake, and the introduction of its Intel 4 node -- which is comparable to Taiwan Semiconductor's (TSM 1.26%) 3nm to 5nm nodes. Gelsinger also said Intel's "data center CPU road map continues to get stronger and remains on or incrementally ahead of schedule" with its latest Xeon chips.

Its margins are gradually stabilizing

Intel's adjusted gross and operating margins were crushed over the past year as its revenue growth slowed and it ramped up its spending to upgrade its foundries. The bears assumed that pressure would persist as it struggled to catch up to Taiwan Semiconductor and Samsung in the "process race" to manufacture smaller and denser chips.

However, that pressure eased in Q2 as its adjusted gross and operating margins expanded sequentially from Q1. It attributed that expansion to its stabilizing revenue growth and cost-cutting measures.

Data source: Intel.

It expects its adjusted gross margin to widen sequentially to 43% in Q3. It didn't provide a forecast for its adjusted operating margin, but it expects government subsidies in the U.S. and Europe to offset some of its expenses.

Intel expects to generate an adjusted EPS of $0.20 in Q3. That would represent a 66% year-over-year decline but also 54% growth from Q2.

Where will Intel's stock be in a year?

Analysts on average expect Intel's revenue and adjusted EPS to decline 27% and 81%, respectively, for the full year. But for 2024, they expect its revenue and adjusted EPS to rise 13% and 346%, respectively, as its cyclical downturn finally ends.

Based on those expectations, Intel's stock looks reasonably valued (but not cheap) at almost 23 times next year's earnings. Its dividend cut this year also reduced its forward-dividend yield to 1.5%, making it less appealing to income investors.

Intel is taking steps in the right direction, but a lot of its recovery has already been baked into its year-to-date share rally of 35%. Therefore, I believe Intel's stock might merely tread water over the next year as it gradually stabilizes its business.