Intel: digital phoenix or fading star in the tech world?

Intel, once an undisputed technological leader, stands today at a crucial crossroads in its history. From dominating the PC and server processor market to struggling with technological delays and fierce competition, Intel's journey has been full of emotion. Under CEO Pat Gelsinger's leadership, the company has embarked on an ambitious transformation strategy, aiming to regain its technological edge and expand into new markets. With a stock price at 2012 levels and a valuation close to liquidation value, Intel presents a risky but potentially very profitable opportunity for patient investors. The success of the IDM 2.0 strategy, particularly the development of the 18A technology process, could not only change the company's fortunes but also allow it to return to the forefront of semiconductor manufacturing.

From dominance to transformation

Intel Corporation, founded in 1968, was the undisputed leader in the semiconductor industry for decades, especially in the PC and server processor segment. However, in recent years, the company has faced unprecedented technological and market challenges. Delays in developing advanced production processes, growing competition from AMD and NVIDIA, as well as changes in the technological landscape related to the development of artificial intelligence, have put Intel in a difficult situation. Failure to capitalize on the uncertainty in the processor market, related to the introduction of tariffs on products from outside the US and the relocation of factories to the country, as well as missing out on the boom in AI-related stocks, have brought the stock price to 2012 levels.

Against the backdrop of competition, there is a visible outflow of investors and a decline in confidence about the company's future. Nevertheless, Intel's current situation may present an interesting investment opportunity for patient investors. The company is in the midst of an ambitious transformation under the leadership of CEO Pat Gelsinger, who returned to the company in 2021 with a mission to restore its former glory. The transformation plan includes not only catching up technologically but also expanding into new areas, including contract manufacturing (foundry) services and the graphics chip market. Another argument for growth potential is the very low valuation, which is below the liquidation value.

Will revenue diversification help survive?

Intel Corporation generates revenue from several key business segments. Each of these segments has its specifics and faces unique market challenges.

Intel's largest source of revenue is the Client Computing Group (CCG), accounting for about 50-55% of the company's total revenue. This segment focuses on producing processors for personal computers and mobile devices, offering popular processor series such as Core i3, i5, i7, and i9. CCG also provides chipsets, motherboards, and Wi-Fi and Bluetooth solutions. The main customers of this segment are OEM manufacturers such as Dell, HP, and Lenovo, as well as distributors and end users.

The second largest segment is the Data Center and AI Group (DCAI), generating about 30-35% of Intel's revenue. DCAI specializes in producing Xeon server processors, AI accelerators, and memory and storage solutions for data centers. The customers of this segment are mainly cloud service providers, large enterprises, and research institutions.

The Network and Edge Group (NEX) accounts for about 10% of Intel's revenue. This segment focuses on solutions for 5G networks, edge computing, and the Internet of Things (IoT). The main customers of NEX are telecommunications operators and network equipment manufacturers.

The remaining 5-10% of Intel's revenue comes from smaller but strategically important segments. These include Mobileye, specializing in autonomous driving technologies, Intel Foundry Services (IFS) offering contract manufacturing services, and the programmable logic devices division, a legacy of the Altera acquisition. These segments, although currently having a limited share in revenue, are seen as potential engines of Intel's future growth.

The decline in margin is currently one of the key challenges for Intel. The company's gross margin has fallen from historical levels of 55-60% to about 38-40% in recent quarters. The main reasons for this phenomenon are high expenditures on the development of new production technologies, including investments in factory modernization, and growing competition, especially from AMD, leading to price pressure in the processor market. Additionally, Intel is struggling with production efficiency problems resulting from lower utilization of production capacity, as well as a general slowdown in the PC and server market after the pandemic boom. Restructuring costs, including a planned 15% workforce reduction, are also affecting the company's current financial situation.

Why is Intel valued near liquidation value

Intel's Tangible Book Value (TBV) per share is currently about $19.51. This means that this is the book value of all net assets per share of the company, after deducting intangible assets. This value reflects Intel's significant tangible assets, including chip factories estimated at about $80 billion, located in the US, Israel, and Ireland, with plans to build new facilities. The factory value is already after depreciation, which may indicate a liquidation price, but may significantly differ from the market price when selling part of the assets. Moreover, Intel possesses enormous intellectual value in the form of thousands of patents related to semiconductor technologies and unique know-how in chip design and production. The company also has significant cash and short-term investments, which at the end of the second quarter of 2024 amounted to about $29 billion. In addition, there are strategic investments, such as stakes in Mobileye, specializing in autonomous driving technologies, and other investments in promising startups and future technologies.

Missed bull market remains visible on financial ratios

Analysis of Intel's financial indicators compared to major competitors in the semiconductor industry reveals significant differences in market valuation, which reflect not only the financial situation of companies but also investor confidence. According to XTB Research data, Intel has much lower valuation ratios than NVIDIA, AMD, Broadcom, or Qualcomm.

Intel's price-to-earnings (P/E) ratio is 40.1, which is much lower than AMD (159.2) or NVIDIA (67.6). Partially, such a high P/E can be explained by declining earnings per share. Therefore, this indicator for Intel should be treated as an interesting fact and focus should be on forward P/E.

Similarly, Intel's price-to-book (P/B) ratio is the lowest in the group at just 0.8, while for NVIDIA it reaches 58.4. The price-to-sales (P/S) ratio also places Intel at the bottom of the list with a value of 1.6, compared to 35.9 for NVIDIA.

These low valuation ratios for Intel are a clear signal of investors' lack of confidence in the company's prospects. They reflect market concerns about Intel's ability to effectively transform its business and regain its position as a technological leader. While competitors, especially NVIDIA and AMD, enjoy high valuations reflecting optimism about their future growth, particularly in AI and advanced computing technologies, Intel is viewed with greater caution. Forecasts for next year suggest that Intel will maintain a relatively low valuation with a forward P/E of 18.7.

Despite low ratios, analyst recommendations for Intel are balanced, with 6 buy recommendations and 6 sell recommendations, with an average target price 22% higher than the current one. This discrepancy between low valuation ratios and moderately positive analyst recommendations suggests that some experts see potential for improvement in Intel's situation, but the market as a whole remains skeptical. This situation underscores that Intel is seen as a value stock, but carries significant risk associated with ongoing business transformation and the need to rebuild investor confidence. At the same time, compared to recommendations for competitors, there are divergences of opinion among analysts combined with little institutional interest, with 12 recommendations for Intel compared to 67 recommendations for Nvidia.

Is Intel at risk of being removed from the dow jones and other important indices?

Intel, despite its long history as a leader in the semiconductor industry, is currently experiencing a significant decline in its share in key stock market indices and ETF funds. In the S&P 500 index, one of the most important benchmarks of the American stock market, Intel's share has shrunk to just 0.19%. This is a significant decrease from the level of over 1% noted just a few years ago. A similar trend is visible in the NASDAQ-100 index, where Intel currently constitutes about 0.59% of the composition. This is a relatively small share for a company that was once one of the pillars of the technology sector. Particularly worrying is Intel's position in the Dow Jones Industrial Average. With a share of only 0.3347985%, the company ranks last in this prestigious index. This situation puts Intel in real danger of falling out of the Dow Jones at the next index composition revision, which would be a significant image blow for the company. In specialized semiconductor sector ETFs, such as the VanEck Semiconductor ETF (SMH) and iShares Semiconductor ETF (SOXX), Intel still maintains a significant share, amounting to 3.08% and 2.71% respectively. However, these values also reflect the company's declining importance in the sector, given its historical position as a leader. Although the risk of completely falling out of major indices such as the S&P 500 or NASDAQ-100 remains low at present, further declines in Intel's market capitalization could lead to further reductions in the company's weight in these indices. This, in turn, could trigger a domino effect in the form of increased selling pressure from index funds and ETFs that would have to adjust their portfolios to changes in index composition.

On the chart, Intel has returned to 2012

Looking at both the daily and weekly charts, what catches the eye is the stock price, which has returned to levels last seen in 2012. The bottom from that period will serve as support for the price and simultaneously one of the Fibonacci retracement levels.

The first resistance will be the 50 SMA at $28.86. Breaking through this value will enable an attack on the 78.6% Fibonacci retracement at $30.04 per share and the 100 SMA at $31.21. The RSI shows a strong rebound after touching oversold levels from 2005. At the same time, MACD is rebounding from the oversold levels noted in the pandemic bottom. (Daily chart) Source: xStation

A similar pattern is visible on the weekly chart. RSI is rebounding even more slowly from oversold levels last seen two and twelve years ago. At the same time, MACD will strive to rebound from the lowest levels in two years. After breaking through the 78.6% Fibonacci retracement, the resistance will be the 100 SMA at $33.70, and then the 50 SMA at $37.05 per share. Breaking through the resistances would open the way for bulls to the 61.8 Fibonacci retracement at $38.43 per share. (Weekly chart) Source: xStation

Uncertain future with a tight schedule

Intel stands at a crucial moment in its history, striving to regain its position as a leader in semiconductor production. The company is implementing an ambitious IDM 2.0 strategy, announced by CEO Pat Gelsinger in 2021, which aims to restore Intel's competitiveness against TSMC and Samsung. This strategy is based on three pillars: expanding Intel's production capabilities using leading process technology, increasing the use of external factories to meet internal needs, and transforming into a world-class semiconductor manufacturer.

The aggressive schedule for introducing new technological processes assumes the implementation of Intel 4 (7nm) for production in 2024, followed by Intel 3 and Intel 20A (2nm) in 2025, and finally the breakthrough Intel 18A (potentially 1.8nm), whose development has been accelerated. The company has already made significant progress, starting mass production in the Intel 3 process, both for internal and external customers. This process offers significant improvements, including a new FinFET transistor design and a high-density cell structure.

In parallel, Intel is developing Intel Foundry Services (IFS), opening its factories to external customers and acquiring strategic partnerships. An example is an agreement with Microsoft worth over $15 billion for the production of custom chips. Pat Gelsinger emphasized the key role of foundry in the company's strategy, saying: "I've put the future of the entire company on 18A". According to industry insiders, 18A is able to effectively compete with TSMC N3, which presents an opportunity for diversification for end recipients. However, Intel must face serious competition from TSMC, which currently dominates the market for advanced production processes. TSMC predicts that by 2028, over 20% of its revenue will come from AI processor production, with an annual growth rate of 50%. This shows how quickly the AI market is developing and how important it is for Intel to keep pace in this field. The ongoing dependence on TSMC products carries risks that may materialize with a change of power in the US or China's approach to the semiconductor industry.

Intel is investing significantly in new production capacities, including the expansion of existing factories and the construction of six new factories in Arizona, Ohio, and Germany. These investments are supported by significant government grants and customer commitments. The company is also investing in breakthrough technologies such as EUV lithography, RibbonFET (GAAFET), and PowerVia (backside power delivery)

To effectively compete with TSMC, Intel must not only keep its technological promises but also attract more customers to IFS by offering competitive prices and production quality. It is necessary to prove that the company can effectively manage production for external customers while maintaining high performance of its own products.

The challenge will be to balance intense investments with maintaining profitability in the short term, especially considering the high fixed costs associated with foundry operations. Intel expects that most of the production in 2025 will still be based on Intel 7 and Intel 10 processes, which may limit the margin benefits resulting from the introduction of new EUV nodes. The company still remains a leader in terms of funds allocated to R&D. Intel spends twice as much as the second-placed Qualcomm and continues to develop its products.

Intel aims to offer a wide range of services from semiconductor production to full system development. This approach reflects changing market requirements, especially in the context of the growing computational needs of generative artificial intelligence.

The company's success will depend on the timely implementation of technological plans, effective acquisition of customers for foundry services, and efficient cost management. If Intel manages to implement these ambitious plans and overcome challenges, it has a chance not only to regain its position as a technological leader but also to become a serious competitor to TSMC in the contract manufacturing market. This could significantly affect the future shape of the global semiconductor industry, potentially changing the balance of power in the industry in the coming years.

Summary

Intel stands at a crucial moment in its history. If it successfully implements its IDM 2.0 strategy, including the development of advanced technological processes and foundry services, it could create an interesting investment opportunity. The current low valuation of Intel's stock compared to the competition suggests that the growth potential is significant if the company succeeds. Particularly important will be achieving the competitiveness of Intel 18A and improving operational efficiency. If these goals are successfully achieved, Intel may not only regain its lost market position but also become a key player in the rapidly developing AI sector and advanced computing technologies. For investors willing to take risks and patiently wait for the effects of transformation, Intel's shares may represent an interesting option with the potential for significant value growth in the long term.

Maksymilian Kuch, Investment Adviser

Stock Market Analyst XTB