This has been a rewarding year for Intel (INTC -0.33%) investors, with shares of the semiconductor company jumping 60%. This year of growth also marked an end to multiple years of underperformance triggered by market share losses to Advanced Micro Devices, challenges in crucial markets such as personal computers (PCs) and data centers, and its inability to exploit new opportunities like gaming graphics cards.
Can Intel sustain its newly found momentum and deliver solid returns to investors over the next three years? Let's see if we can find the answer.
Intel's fortunes are about to change
Intel's revenue and earnings declined substantially over the past few years thanks to headwinds like those mentioned above.
INTC revenue (TTM); data by YCharts. TTM = trailing 12 months.
However, the company's guidance for the fourth quarter of 2023 suggests that a turnaround is in the cards. Intel management anticipates $15.1 billion in revenue in the current quarter at the midpoint of its guidance range, which would be an 8% increase over the prior-year period. Revenue fell 32% year over year in the fourth quarter of 2022, so the forecast for the current quarter points toward a big turnaround.
The chipmaker has also guided for adjusted earnings of $0.44 per share in the current quarter, which would be a big jump over the prior year's $0.10. It is important to understand the reasons behind this impressive turnaround in Intel's fortunes because they are going to play an important role in deciding the stock's fate over the next three years.
The first key factor driving a turnaround at Intel is the improving scenario in the PC market. Market research firm IDC estimates that PC shipments are on track to drop 14% this year. But sales are expected to pick up in 2024, growing an estimated 3.7%.
On the other hand, another market research firm, Canalys, is forecasting an 8% increase in PC shipments next year thanks to the adoption of AI-capable PCs. The firm expects the growth to continue in 2025 as well with a double-digit increase.
This improvement in PC sales is going to be a tailwind for Intel's client computing group (CCG), which includes sales of processors deployed in desktops and laptops. CCG is Intel's largest business unit, accounting for 55% of its top line in the third quarter.
The segment generated $7.9 billion in revenue last quarter, down 3% over the prior year. Intel says that its PC customers have "completed their inventory burn in the first half of the year," which is why it expects the client business to continue improving on the back of healthy demand.
Meanwhile, the company's data center and artificial intelligence (DCAI) business also exceeded expectations in the third quarter, driven by the growing adoption of its server processors for AI workloads. A third of Intel's fourth-generation server processors were used for AI applications. The company is looking to push the envelope in this market with its fifth-generation processors that are already in production and will be launched later this month.
Management is confident that its new offerings could help it corner more share of the server processor market, and help it cut its teeth in the fast-growing market for AI accelerators. Given that shipments of AI servers are anticipated to grow at an annual pace of 29% through 2026, according to TrendForce, Intel's pipeline of AI-related revenue could continue improving over the next three years.
The company says that the sales of its Gaudi AI accelerator almost doubled in the third quarter, and the company is looking to shore up supply to meet an increase in demand next year. All this explains why analysts are confident of a turnaround in Intel's fortunes over the next three years.
How much upside could the stock deliver over the next three years?
The following chart tells us that analysts have raised their revenue expectations for Intel for 2023, 2024, and 2025.
INTC revenue estimates; data by YCharts.
Its top line is anticipated to increase 13% in 2024, followed by a 9% increase in 2025. The company could do better than that if it can capitalize on the opportunities discussed above. Assuming Intel manages to deliver a 10% revenue jump in 2026, its top line could increase to $73 billion after three years based on the 2025 revenue estimate shown above.
Intel currently trades at 3.3 times sales. A similar multiple after three years would translate into a market cap of $241 billion based on the 2026 revenue estimate, a 35% increase over Intel's current market cap.
So this semiconductor stock could help build investors' wealth over the next three years, which would be a nice turnaround when compared to how Intel has performed over the past three years.
