For many years, Intel (INTC -0.33%) dominated the central processing unit (CPU) market. But the era of artificial intelligence (AI) helped a new breed of innovators rise to the top. Nvidia and Advanced Micro Devices (AMD -8.91%) present mounting threats to Intel's leadership, which is evident in the share price performance of these three companies over the last five years.
That said, Intel's prospects are looking much better. Improving revenue performance has pushed the stock price up 65% year to date, and the company's new processors for the data center market could support further gains in 2024.
Let's review three reasons why Intel stock is a solid investment right now and also consider one reason to sell or avoid it.
1. Intel's foundry business is gaining traction
With 80% of the world's semiconductor manufacturing based in Asia, many chip designers would like more options to better diversify their supply chains. Intel answered the call and moved forward with a $40 billion investment for new factories in Ohio and Arizona. In addition to making chips for other companies, Intel's foundry service will also lead to investment in new technologies that could benefit its own chip designs over the long term.
Intel's profits have taken a hit following these massive expenditures, but the early results show a promising opportunity. Third-quarter revenue from Intel's foundry services grew 34% over the previous quarter to $311 million.
Intel's expanding manufacturing capabilities could grow into a significant source of growth and competitive advantage over time.
2. Intel's chip sales are improving
While the outlook for the semiconductor industry is still weak, Intel seems to have already hit bottom. Revenue grew year over year in each quarter in 2023, and management expects fourth-quarter revenue to be up again.
"We delivered a standout third quarter, underscored by across-the-board progress on our process and product roadmaps, agreements with new foundry customers, and momentum as we bring AI everywhere," said Pat Gelsinger, Intel CEO.
Intel stock has followed the company's revenue performance over the last year, so the improved guidance could point to more upside. Management noted on the Q3 earnings call it has increasing line of sight in achieving its goal of regaining industry leadership. Executives expressed optimism before, but this time they have improving revenue performance to back it up.
3. New server chips could boost Intel's revenue in 2024
Intel accelerated its research and development spending over the last three years, and those investments could lead to more growth. The company's Sierra Forest, Emerald Rapids, and Gaudi processors are expected to capture more share of the data center market next year.
INTC Research and Development Expense (TTM) data by YCharts
Intel's stronger competitive position across its Xeon server chip portfolio has Wall Street boosting its revenue estimates. Current projections call for revenue to increase by 13% next year, which could send the stock higher.
Reason to sell: Intel no longer dominates the field
Investors are more bullish on the company's prospects, but it's still questionable whether it can derail AMD's momentum.
AMD's revenue from its Gen 4 EPYC processors grew 50% sequentially in the third quarter, with its total share of the server chip market exceeding 25%. That is more than double its share at the end of 2022. AMD sees momentum for its AI solutions, including strong customer interest for its upcoming MI300 AI accelerators.
Considering the increased competition, Intel stock is not cheap. The shares currently trade at a forward price-to-earnings ratio of 46 times based on 2023 estimates and 23 times next year's consensus earnings estimate. Investors are betting that Intel is back, but if management is wrong and AMD continues to gain market share in data centers, that could lead to disappointing returns for Intel shareholders.
