Intel (INTC -9.20%) has been a semiconductor industry giant for decades, but its stock certainly hasn't reflected that in recent years. In fact, one could argue it's been a downright dreadful investment for a while now. Even when accounting for reinvested dividend payments, Intel stock is down 4% over the last five years compared to a market-trouncing 176% return for the iShares Semiconductor ETF (SOXX 2.11%) over that same span of time.
In fact, Intel has sorely lagged behind the market dating all the way back to 2000.
Data by YCharts.
However, Intel has been heating up again in 2023 and by some metrics could finally be a compelling value for the road ahead as the company doubles down on chip manufacturing. But value is dependent on future business execution. Is Intel really cheap enough to warrant an investment right now?
Intel finally takes drastic measures
Current CEO Pat Gelsinger was brought back to Intel in early 2021 to navigate the company's turnaround strategy. Some really drastic actions were (finally, in my opinion) taken just over the past year to more aggressively align Intel with current market needs: friendshoring and onshoring of semiconductor manufacturing.
In the wake of the pandemic and a resulting shortage of semiconductors, countries around the globe have begun shelling out billions of dollars to bring chipmaking home (onshoring) or to bring it to the shores of political allies (friendshoring). Paired with expectations for global-chip sales to increase more than 80% from approximately $550 billion this year to $1 trillion by 2030, suffice it to say this is a big opportunity.
The only problem is building new fabs (a facility that makes chips) and upgrading existing ones is extremely expensive, and it takes no less than a few years to complete a construction project. But Intel has landed billions of dollars in subsidies to chart its journey forward. It has enlisted help from the U.S. to expand facilities in Arizona, has indicated upcoming expansions at its Oregon fabs, and has broken ground on a new mega-project in Ohio -- all supported by some funding from the U.S. CHIPS and Science Act and local governments.
It also inked deals in Germany and Poland for new facilities to support Europe's aspirations to play a larger role in chipmaking (in part through the European Chips Act). And though its proposed acquisition of Israel's Tower Semiconductor (NASDAQ: TSEM) fell through, it recently announced an agreement to provide manufacturing capabilities to Tower through an Intel facility in New Mexico.
Intel has done some things to help itself along the way, too. It slashed its dividend payment, has been exiting business lines it has deemed non-strategic to its core business to whittle down expenses, and has been selling some other business units to raise cash, including selling more stock in its auto-chip design subsidiary MobilEye (NASDAQ: MBLY).
A nasty downturn complicates matters
Intel has been navigating this transformation into more of a manufacturing-focused chip empire during a particularly nasty downturn for the industry. First, PC processors (Intel's bread-and-butter) have been in decline since mid-2022 after massive consumer spending during the pandemic fell off a cliff. And second, data-center server sales have also been down as data-center operators have made a hard pivot to focus their spending on Nvidia (NASDAQ: NVDA) GPUs for generative AI.
Then in June, Intel revealed that its existing manufacturing unit has been in dire straits. It's been losing lots of money, and in an effort to boost its chipmaking services to the industry overall, it will begin reporting some of Intel Foundry Services' (IFS) financials as if it's a stand-alone business going forward.
Collectively, these developments haven't just toppled Intel's sales but have sent the company deep into the red, as measured by both generally accepted accounting principles (GAAP) net income and free cash flow.
Data by YCharts.
The turnaround takes hold?
Intel did start to mount a recovery in Q2 2023, with revenue, net income, and free cash flow all increasing over Q1 2023 levels (net income returned to positive territory although free cash flow remains deeply negative at the moment).
Based on Wall Street analysts' forecasts for 2024, Intel stock trades for 39 times expected earnings per share, or 21 times earnings on an adjusted basis. The average analyst estimate still sees free cash flow staying negative for a while, given how much Intel will need to spend on its aggressive manufacturing expansion.
By certain measures, the stock is starting to look cheap. I've been highly critical of Intel the past few years, but I'm starting to warm to the idea that this turnaround will be the real deal. Risks still abound, though, especially given the amount of cash being shelled out right now for new and expanded fab operations spanning the globe. I'm personally not buying just yet (I like semiconductor fab-equipment stocks, suppliers to Intel's manufacturing dreams) and think any bet on an Intel rebound should remain small.
But Intel does have my serious attention again.
