When investors think about artificial intelligence (AI) stocks, Intel (INTC +4.36%) is not the first name that typically comes to mind. The spotlight often shines on companies like Nvidia, Advanced Micro Devices, and Palantir Technologies.
Yet Intel trades at a price-to-sales (P/S) ratio of just 2.4 -- on the lower end of its 10-year range. In an era rife with expensive valuations, Intel's multiple almost feels outdated.
Data by YCharts.
Let's explore what's going on with Intel and assess the factors driving its depressed valuation. Is Intel a classic value trap or a sneaky buy hiding in plain sight?
What has caused Intel to fall behind in the chip landscape?
The heart of Intel's challenges lies in its foundry division. Once a global leader in semiconductor manufacturing, Intel has steadily ceded ground to overseas competitors such as Taiwan Semiconductor Manufacturing and Samsung. This market erosion has carried two major consequences.
First, Intel has stumbled in executing on its foundry roadmap, ultimately delaying progress on next-generation GPUs and CPUs. This has weakened the company's credibility with leading chip designers. As a result, industry giants like Apple, Nvidia, and AMD now overwhelmingly rely on Taiwan Semi for their most advanced fabrication needs, given its ability to produce cutting-edge nodes at scale.
Second, these delays have taken a visible toll on Intel's financial profile. In an effort to catch up, the company is embarking on a challenging and costly turnaround strategy. The massive capital expenditures required to reignite its foundry capabilities are pressuring both profit margins and free cash flow.
Data by YCharts.
As a result, Wall Street appears to be pricing in this uncertainty. While trading at just 2.4 times sales may give the appearance of a bargain, Intel's steep discount reflects clear investor skepticism about whether the company can truly stage a credible comeback in an industry where execution missteps have cost billions of dollars.
Intel investors just got some great news
In the modern AI era, semiconductors are no longer commoditized pieces of hardware tied to cyclical booms and busts; they are critical infrastructure.
The U.S. government recently acquired a 10% stake in Intel -- a clear vote of confidence in the company's role as a strategic asset for national security and domestic supply chains. This support from Washington suggests that Intel is simply too important to be left behind as a technological relic.
Adding to the intrigue, Nvidia recently invested $5 billion into Intel as well. This is striking, given the two companies are, in some ways, competitors. Nvidia's move underscores just how powerful demand is for advanced foundry capacity.
If Intel can reestablish itself as a credible alternative to TSMC, its addressable market could expand dramatically. Even modest gains in market share would translate into billions of incremental revenue.
Image source: Getty Images.
Why Intel might be a sneaky buy
These developments outlined matter. A government-backed turnaround plan, reinforced by validation from Nvidia, creates a floor under Intel stock and a compelling narrative for the business. Simply put, the company is too strategically important to be written off entirely -- suggesting that today's depressed valuation leaves room for upside.
NASDAQ: INTC
Key Data Points
That said, expectations should remain tempered. Intel is unlikely to blossom into the next AI darling overnight. The company still trails rivals in advanced foundry technology, and reclaiming a meaningful foothold could take years.
Even so, Intel trades at one of the cheapest valuations in the semiconductor industry. For contrarian investors willing to bet on improvements in execution and secular AI-driven tailwinds, Intel may represent one of the most overlooked -- and potentially rewarding -- ways to gain exposure to the AI opportunity.
Despite all the turbulence, Intel might not be the falling knife that many bears assume it is.
