Intel (INTC 0.33%) is likely facing the most significant crisis in its history. The company produced the first commercially available microprocessor, making itself the world's largest semiconductor company and maintaining that title for decades.
Unfortunately for Intel, it lost its technical lead in the 2010s. While it remains one of the industry's major producers, companies like Nvidia and Taiwan Semiconductor (TSMC) eclipsed it in size and technical prowess.
The latest crisis is CEO Pat Gelsinger's ongoing attempt to bring Intel back to the top, and indeed, investors should temper expectations of any near-term comeback. Still, the pessimism surrounding Intel is likely overdone, and the semiconductor industry's dynamics could help it bounce back.
The state of Intel
Admittedly, nobody should assume that Intel will become the leading chip stock anytime soon, if ever. In the first six months of 2024, the company reported just under $26 billion in net revenue, a 4% rise from year-ago levels.
While its revenue levels may sound substantial, TSMC reported $40 billion in revenue over the same period, while Nvidia's revenue in its fiscal first quarter of 2024 alone was $26 billion. This makes Intel far from being the world's largest chip producer.
Further, the company recorded a net loss of $2 billion, during which time it also spent nearly $12 billion upgrading its infrastructure. Moreover, it rattled investors when it announced the suspension of its dividend and a layoff affecting over 15% of the company's workforce. With that, Intel stock plunged to multiyear lows. The stock is now down 60% this year.
Consensus estimates point to net revenue plunging 14% for the year, and a subsequent 7% recovery will still leave Intel's net revenue for 2025 below 2023 levels. Also, the consensus price target of around $24 per share prices it below its $29.05 per share closing price on Aug. 1. Such sentiment has demoralized investors, if the recent stock price action is any indication.
Is Intel too low?
Despite that decline, the pessimism may have gone too far. The most glaring evidence for the overreach of bears is Intel's price-to-book value ratio of 0.76. This means Intel trades at a 24% discount to the value of its assets minus liabilities.
Additionally, Intel's revenue level makes it the fourth-largest chip producer by revenue, behind Samsung, Nvidia, and TSMC. Hence, even with its current struggles, it remains a major presence in the industry.
Furthermore, it formed a foundry business called Intel Foundry. This makes Intel a competitor with TSMC and Samsung as it opens its internal manufacturing capacity to third parties.
Intel Foundry made up 25% of Intel's operating segment revenue in the first half of the year. It signed deals with companies like Microsoft, Ericsson, MediaTek, and others, implying that this will become an increasingly important revenue source over time.
More importantly, with the industry concentrated in Taiwan, governments in the U.S. and Europe feel Intel needs to succeed for national security reasons. To this end, they granted Intel billions in subsidies as it builds advanced foundries on both sides of the Atlantic Ocean.
To this end, Intel purchased the most advanced manufacturing equipment from ASML, meaning it will likely produce cutting-edge chips. Hence, even if it cannot catch TSMC technically, it will probably become one of the world's most advanced chip producers within the next few years.
Should I buy Intel?
Intel became a chip stock many investors want to avoid. With its struggles, investors can probably find chip stocks with more growth potential. Nonetheless, investors may want to consider a small, speculative position in this stock.
Indeed, consensus estimates make it unlikely its financial performance will excite investors in the foreseeable future. However, Intel remains a major presence in the chip industry. Despite its lackluster revenue growth, its $26 billion in net revenue over the last six months speaks to its remaining importance.
Moreover, with the amount it is spending to make Intel Foundry a major chip producer, it could become the most important manufacturer outside of Taiwan. Hence, even if it cannot regain its technical or industry leadership, it is much more likely to succeed than its price-to-book value ratio implies.
