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Intel (INTC), once a leader in the semiconductor industry, is currently navigating a period of significant challenges and uncertainties. The stock has plummeted nearly 60% year-to-date, significantly underperforming the S&P 500 Index’s ($SPX) gain of about 9%. Adding to the concerns, the company sees second-half (2H 2024) trends as more challenging, as it faces margin and competitive headwinds.
The ongoing challenges cast doubt on the company’s future viability and market positioning. Moreover, Intel’s problems are compounded by broader macroeconomic uncertainties. In response, Intel is implementing cost-cutting measures to stabilize its finances amidst declining market share and shrinking margins.
While Intel’s cost-cutting and growth initiatives are positive steps, there are concerns about the company’s ability to meet its strategic goals, especially given the fierce competition from Advanced Micro Devices (AMD) in both the Client Computing Group (CCG) and Data Center and AI Group (DCAI) segments. This uncertainty makes it challenging to justify buying Intel stock at current levels.
Conversely, the substantial drop in Intel’s stock price suggests that many of the negatives are already priced in, which makes selling the stock at current levels potentially risky.
Intel is at a critical juncture, requiring solid actions to regain investor trust. Here’s a closer look at the factors to understand why investors should take a cautious stance.
The Bull Case for Intel Stock
Despite a disappointing second quarter, Intel is accelerating efforts to improve profitability and capital efficiency, targeting over $10 billion in savings by 2025. The company aims to reaccelerate growth by focusing on the artificial intelligence (AI) PC category, which is expected to grow significantly in the coming years.
Further, the company will launch its first client CPU on the Intel 18A process in the second half of 2025, promising enhanced performance and cost competitiveness. The new product could drive volumes and boost the company's margins.
Intel's cost-reduction plan could prove to be a key short-term catalyst. The company aims to cut operating expenses to approximately $20 billion in 2024 and further reduce them to $17.5 billion in 2025, representing more than 20% below its prior estimates. These actions include a significant reduction in headcount by the end of this year.
Intel is also focusing on bolstering liquidity by suspending its dividend payouts starting in the fourth quarter. The move will enable the company to support the investments needed to execute its turnaround strategy.
The Bear Case for Intel Stock
Intel is taking measures to cut costs. However, fundamental issues - such as increased competition and market share losses - could continue to adversely impact its financials.
During the Q2 conference call, the company's management said they would continue investing in their growth strategy, even if they reduced overall spending. However, Intel’s revised capital expenditure forecast for 2024 is between $25 billion and $27 billion, a considerable reduction of over 20% from previous guidance. This reduction could potentially hinder Intel’s ability to maintain competitiveness and market share in its CCG and DCAI segments. Also, the reduction in capex is seen as a negative development, as it indicates softer second-half demand.
While Intel’s management is confident that cost reductions will lead to sustainable earnings growth, execution risks and the pace of recovery remain concerns. Moreover, new product ramps in 2025 are expected to limit margin improvements and pressure earnings, mainly due to investments in the AI PC category. Also, the company’s product mix will continue to be a headwind for the margins in the coming quarters.
The Bottom Line on Intel Stock
As Intel faces challenges, investors should exercise caution and avoid showing immediate optimism. Although the recent stock price decline might suggest a potential value buying opportunity, the inherent risks associated with Intel’s uncertain path forward warrant a cautious approach. Moreover, the notable drop in Intel’s stock price (about a 30% drop in two trading days) makes shorting it equally daunting.
As Intel focuses on initiatives to restore investors’ confidence and enhance its competitiveness, the path to recovery remains uncertain, reflected by the cautious stance adopted by analysts. Among 34 experts covering INTC, three recommend a “strong buy,” one suggests a “moderate buy,” 26 have a “hold,” one recommends a “moderate sell,” and three suggest a “strong sell,” reflecting a consensus rating of “hold.”
Given the significant decline in its price, Intel stock's average price target of $39.45 indicates a potential upside of about 96.2% from current levels.
On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
