Intel (INTC +2.55%) is emerging as one of the biggest battleground stocks of the year.
Shares of the chip titan, best known for its personal computer CPUs, plunged in early August after the company missed analysts' estimates with its second-quarter results, offered weak guidance for the third quarter, said it would eliminate its dividend, and announced a restructuring plan that included laying off at least 15% of its workforce, or 15,000 people.
Intel shares fell to below $20 in the aftermath of all that news, but recently, they seem to be on the rebound. Intel announced a new $3 billion contract from the U.S. Defense Department, as well as an expanded partnership with Amazon that will have Intel's foundries making AI chips for the tech giant.
In the last few days, other signs have emerged that the stock may be undervalued. Qualcomm, a chipmaker worth nearly $200 billion, reportedly expressed interest in buying Intel. Private equity firm Apollo Global Management also offered to invest $5 billion in Intel stock, a clear bet on its turnaround.
Investors have been asking why Intel is so cheap. There are differences in the ways one can measure the valuation of a company like Intel, so let's dig in to see what the best answer is.
Image source: Getty Images.
Is Intel stock really cheap?
At a time when so many chip stocks are booming, Intel is moving in the opposite direction. Its share price, for example, is just $22 or so, making it the lowest-priced stock in the Dow Jones Industrial Average. However, share price alone tells you almost nothing about the valuation of a company.
By one popular metric, price-to-sales (P/S) ratio, Intel, at 1.7, is indeed cheaper than many of its peers -- and significantly cheaper than competitors like AMD, Nvidia, and Taiwan Semiconductor.
INTC PS Ratio data by YCharts.
Given that Intel is much cheaper than the competition on a revenue basis, it suggests that the stock could soar if its margins improved. Therein lies the primary challenge facing Intel, as its profitability has eroded in recent years, and profits are ultimately what counts for investors.
Here are the price-to-earnings ratios for that same group of stocks.
INTC PE Ratio data by YCharts.
On an earnings basis, Intel is significantly more expensive than TSMC and Nvidia, and it's the only company in the group that isn't growing profits right now.
On a free-cash-flow basis -- a metric that some investors prefer to use to assess profitability -- the situation looks even worse for Intel. It has had a negative free cash flow of $10.4 billion over the last four quarters as it ramped up investments in its foundry division. At the same time, many of its competitors are seeing record free cash flows thanks to the AI boom.
NASDAQ: INTC
Key Data Points
What needs to happen for Intel to turn around
The argument that Intel is cheap, which potential bidders like Qualcomm and Apollo seem to believe, is premised on the idea that the stock is temporarily impaired, and that the company itself is uniquely well positioned because of the boom in AI and surging demand for chip manufacturing capacity, especially in the U.S.
By that line of thinking, Intel has an advantage over fabless peers like Nvidia and AMD because it owns foundries.
CEO Pat Gelsinger has also made big promises about the potential of Intel Foundry Services. In April, Gelsinger told investors that the company is targeting 30% adjusted operating margins at its foundry business by 2030, and a 40% adjusted operating margin in products. If Intel maintained its current P/S ratio and achieved those margins, its stock would trade at a single-digit P/E ratio, meaning it would almost certainly benefit from multiple expansion.
It's hard to take those 2030 forecasts at face value after the recent setback, but Intel's foundry business is in an enviable strategic position as the U.S. government is supporting it with funding and tax credits through the CHIPS Act as a hedge against Chinese manufacturing and the threat of China invading Taiwan, where a large fraction of the world's high-end chips are produced.
Intel has also touted its AI chip, the Gaudi 3 accelerator, which it says is faster than the Nvidia H100, though it could take a few quarters to see how the Gaudi 3 sells.
At this point, to describe Intel stock as cheap requires investors to ignore a long history of product misses and blown opportunities -- but there is value in the company.
Whether management can unlock that value is still an open question, but the stock has a lot of upside if Gelsinger can hit those 2030 goals, or even make significant progress toward them.
