Computer chip company Intel Corporation (INTC -9.20%) is a tough stock to figure out. Most recognize Intel for the processors it puts in personal computers, but Intel has dominated data centers for a long time. Management is giving the company a makeover, investing billions of dollars to make Intel a leading semiconductor manufacturer, much like Taiwan Semiconductor.
The company recently closed the year with fourth-quarter earnings, and Wall Street didn't like what they heard. Intel's stock took a punch to the chin, plunging on its results. Now, investors are left to determine whether this is a buying opportunity or a sinking ship to avoid.
You never want to count out a big-name technology company like Intel, so I've looked at how the company progressed during Q4 to determine the smart move for investors today.
Intel's fabrication ambitions are a huge gamble
There is a fine line between placing a confident bet and being reckless. Intel invented the programmable microprocessor and x86 architecture, which became the primary design for central processing units and servers. It's like the technology version of Coca-Cola, a fantastic product that spawned an empire. It dominated for decades, but competition steadily chipped away at Intel's market share, especially in data centers.
After the current CEO, Patrick Gelsinger, took over in 2021, the company embarked on an ambitious plan to invest in becoming a leading semiconductor manufacturer, called a fab in the industry. Most chip companies design chips but outsource production to fabs, Taiwan Semiconductor being the biggest.
Intel has projects to build facilities in several U.S. states. It's poised for assistance from the U.S. government via the Chips Act, passed in 2022, but the company is still spending tens of billions of dollars. It's borrowing heavily to help fund these plans.
INTC Capital Expenditures (TTM) data by YCharts
Intel has increased its long-term debt by about 50% in short order and is leveraged at over 4 times its EBITDA, a concerning level -- I would like to see a level of around 2.5. The company's fab business must thrive once it's up and running, or investors could be left with a financially crippled business.
Foundry revenues doubled in 2023 to $952 million, but that's a small piece of Intel's total $54 billion. Nobody will know how successful Intel's fab business is until its various projects are up and running. That will be several years from now.
Should investors worry about AI?
Artificial intelligence (AI) has been a big boost for several companies, and it should be for Intel. The company is bringing new chips to market, targeting AI applications. This includes its upcoming Gaudi3, an AI chip for generative AI like ChatGPT. This strategy means it will compete directly with Nvidia, which currently dominates that market with its H100 chip.
While Nvidia has enjoyed a surge in AI chip demand, Intel's data center and AI business is shrinking noticeably.
| Business Unit | Q4 2023 | Versus Q4 2022 | 2023 | Versus 2022 |
|---|---|---|---|---|
| Client computing group | $8.8B | 33% | $29.3B | (8%) |
| Data center & AI | $4.0B | (10%) | $15.5B | (20%) |
| Network & edge | $1.5B | (24%) | $5.8B | (31%) |
| Mobileye | $0.637B | 13% | $2.1B | 11% |
| Foundry services | $0.291B | 63% | $0.952B | 103% |
Chart by author. Data source: Intel Corporation Q4 2023 earnings.
It's only a snapshot, but Nvidia's rapid ascension in AI creates an undoubtedly uphill battle for Intel and other competitors.
Is Intel stock a buy?
Wall Street wasn't impressed with Intel's outlook. Revenue guidance for the first quarter is between $12.2 billion and $13.2 billion, a 13% year-over-year increase if Intel hits the high end. However, it's clearing a low bar since it's compared to 2023's Q1 revenue, which was 36% less than in Q1 2022. Earnings per share could be just $0.13 in Q1 as investments into the fab business continue.
Investors can see below how the market began pricing more risk into the stock throughout 2022, but the stock has since rallied with the broader market. Buying the stock today requires comfort with Intel's increasing debt and its uncertain footing in AI. You also have to believe that its fab business will be a massive success as it comes online over the coming years.
There's no reason Intel can't knock it out of the park, but there are many potential outcomes. That makes predicting how good a business Intel will be years from now a tough job. It could take time to get a good look at earnings growth potential, as the significant moving parts within Intel make it hard to trust growth estimates that could change from quarter to quarter.
Investing is about using the facts to find your best chances of success. Intel looks more like a dice roll today, making it a stock to avoid until there is a clearer picture of how well the company can compete in the future.
