While the semiconductor industry is experiencing a significant rally due to the artificial intelligence (AI) revolution, Intel (INTC) finds itself lagging behind its peers. Companies like Nvidia (NVDA), Broadcom (AVGO), and Taiwan Semiconductor Manufacturing (TSM) have seen their stock prices soar, thanks to their pivotal roles in AI technology. Nvidia’s stock has surged 200% over the last 12 months, with Broadcom and TSMC not far behind. In contrast, Intel’s stock has risen only 8% in the same period and has dropped nearly 31% this year.

Challenges in AI and Traditional Markets

Despite being a market leader in central processing units (CPUs), Intel is struggling to compete in the AI space, particularly with graphics processing units (GPUs) that are central to AI workloads. “Intel […] has some AI products, but they don’t appear to be making much of a dent in the market versus Nvidia,” says Morningstar equity strategist Brian Colello. Additionally, in its core personal computer market, Intel faces stiff competition. “Qualcomm [QCOM] appears poised to gain PC processor market share at the expense of Intel,” Colello notes.

Intel has also fallen behind in chip manufacturing technology. “For several years, Intel has struggled by falling behind the curve on chip manufacturing, moving from a technological advantage over TSMC to a clear technological disadvantage in recent years,” Colello explains. This has allowed competitors like AMD to gain market share in both PC and server processors.

Key Metrics and Valuation

• Fair Value Estimate: $30.00
• Morningstar Rating: 3 Stars
• Economic Moat: None
• Morningstar Uncertainty Rating: High
• Forward Dividend Yield: 1.49%

Assessing Intel’s Future Prospects

Intel’s historical strength in microprocessor design and manufacturing has been overshadowed by recent missteps and fierce competition. The shift in demand from PCs to mobile devices and cloud computing has also impacted its performance. While Intel is attempting to catch up to TSMC’s manufacturing capabilities, this segment is proving less profitable than anticipated. Moreover, Intel’s efforts in AI products are not as extensive as those of industry leaders like Nvidia.

The introduction of the “AI PC” by Microsoft, utilizing Qualcomm’s Arm-based processors, poses another challenge. “These PCs should gain share over traditional x86 PC processor vendors, mostly Intel (and perhaps, to a lesser extent, AMD). It’s possible that Intel catches up in manufacturing, but its various ecosystems shift to chips designed by others,” Colello observes.

Is Intel Stock Undervalued?

Despite the significant drop in Intel’s stock price, Colello doesn’t see it as a bargain yet. For a bullish scenario, Intel would need to improve foundry profitability faster than expected, possibly taking a lead in manufacturing processes or securing large foundry partners to offset share losses. “Our base case assumptions imply that Intel is fairly valued, given the various opportunities and threats,” he states.

Intel is trading around $33 per share, down from about $50 at the start of the year. Colello mentions that the most likely path for upside is if the company can execute on its aggressive advanced manufacturing roadmap. “If so, there’s a path for Intel to slow the bleeding a bit on the PC and server market share front. Also, even if Intel were to lose share in selling chips, there’s potential for the company to manufacture these chips for its competitors,” he explains.

Fair Value Estimate and Financial Outlook

Morningstar’s fair value estimate for Intel stands at $30 per share, implying a 2024 adjusted price/earnings ratio of 30.5 times and a 2025 ratio of 15 times. Intel’s revenue fell 14% in 2023 due to a significant pause in PC spending, market share losses, and cautious spending among data center customers. A modest rebound is expected in 2024, with only 1% growth modeled.

On the positive side, Intel should see some growth in PC CPU revenue in 2024 and expects to earn $0.5 billion in AI accelerator revenue from its Gaudi products. However, spending on server CPUs remains muted as cloud customers focus on AI accelerators, mainly from Nvidia.

No Economic Moat Assigned

Intel currently has no economic moat assigned by Morningstar. The company’s returns on invested capital have declined, and it did not earn excess returns in 2022 or 2023. The deterioration stems from manufacturing struggles and significant investments in new manufacturing processes. While there is potential for Intel to regain a moat if it successfully executes its technological roadmap, previous stumbles necessitate a cautious approach.

Financial Strength and Risks

Intel faces financial challenges due to its recent inability to generate free cash flow and its plans for substantial capital investments in chip manufacturing globally. As of March 2024, Intel held $21.3 billion in cash and investments against $52.4 billion in debt. The company, which used to generate over $10 billion in free cash flow annually, burned $9 billion in free cash in 2022 and almost $12 billion in 2023. Consequently, Intel slashed its dividend in 2023.

The firm is assigned a High Uncertainty Rating due to execution risks associated with keeping pace with Moore’s Law and developing cutting-edge processors. Intel’s aggressive plans to achieve five processor nodes in four years by the end of 2025 add to this uncertainty.

Analyst Perspectives

Bullish Viewpoints:

• Intel remains one of the largest semiconductor companies globally, holding a significant share of the PC and server processor markets.
• The company’s turnaround plans include shedding noncore businesses and forming innovative co-investment partnerships.
• Intel’s diverse portfolio positions it to serve a larger portion of the booming AI semiconductor market.

Bearish Viewpoints:

• Past manufacturing delays cast doubt on Intel’s ability to execute its aggressive technological aspirations.
• AMD is currently seen as a more credible chip designer in the x86 space for PC and server CPUs.
• Nvidia’s GPUs dominate the AI accelerator market, potentially shifting cloud computing spending away from Intel’s products over time.