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While the broader Dow Jones Industrial Average ($DOWI) is trading at all-time highs, semiconductor giant Intel (INTC) is trailing the broader markets by a wide margin. The tech stock is down 70% from all-time highs after falling close to 58% in 2024.
Valued at a market cap of $88.4 billion, let’s see if underperforming Intel stock is a good buy following its foundry spin-off plans.
Intel Makes a Big Move
Intel stock rallied 6% on Monday, Sept. 16, after the company disclosed plans to spin off its foundry business into an independent unit with its own board of directors. The spin-off should give the standalone business the flexibility to evaluate independent sources of funding and benefit from a cleaner corporate structure.
Like Taiwan Semiconductor (TSM), Intel’s foundry business will manufacture chips for other companies. The chip maker has committed to spend $100 billion on this business unit as it aims to expand manufacturing facilities in four states in the U.S. In 2024, its capital investments in the business totaled $43.4 billion, up from $36.7 billion in 2022.
This segment reported an operating loss of $7 billion in 2023 and $5.2 billion in 2022. Intel CEO Pat Gelsinger explained that losses for its chip-manufacturing business will peak this year and break even by 2027. Gelsinger further estimated the business to end 2030 with a gross margin of 40%, which is lower than Taiwan Semiconductor's 53% margin.
Intel’s legacy chip business continues to struggle as Nvidia (NVDA) dominates the market amid the artificial intelligence (AI) megatrend with its asset-light, fabless model. According to multiple reports, Nvidia accounts for 80% of the AI chip market, which is used to power AI workloads.
To offset its rising losses, Intel announced it would reduce its workforce by 15% as part of its $10 billion cost-saving plan. Lower-than-expected demand has forced Intel to temporarily suspend its fabrication efforts in Europe for two more years while shelving plans to build a manufacturing unit in Malaysia.
On the other hand, the U.S. government awarded Intel $3 billion because, given growing geopolitical tensions, it wants companies to manufacture chips locally and reduce their dependence on other contract manufacturers such as TSMC.
Earlier this week, Intel also announced a partnership with Amazon Web Services (AWS). As part of the collaboration, Intel will manufacture an AI fabric chip for Amazon's (AMZN) AWS on its most advanced process node- the Intel 18A. The co-investment in custom chip designs will help accelerate the performance of AI applications.
What's Next for Intel Stock?
While the recent developments might excite investors, Intel still has to showcase its ability to shore up its financials. In Q2 of 2024, it reported sales of $12.83 billion, down 1% year over year and below estimates of $12.94 billion. Its adjusted earnings of $0.02 per share were also well below the consensus forecast of $0.10 per share.
Moreover, its GAAP (generally accepted accounting principles) loss of $1.61 billion was attributed to its decision to scale the production of chips used to process AI workloads. Intel expects its AI PC market to grow from less than 10% in 2024 to over 50% in 2026. It also estimates shipments for AI-powered PC chips to total 40 million units this year.
However, compared to Nvidia and Broadcom (AVGO), which are enjoying multiple AI tailwinds, Intel’s data center and AI segment reported revenue of $3.05 billion, down 3% year over year.
Out of the 36 analysts covering Intel stock, two recommend “strong buy,” one recommends “moderate buy,” 30 recommend “hold,” one recommends “moderate sell,” and two recommend “strong sell,” for an overall consensus of “hold.”
The average target price for INTC stock is $29.26, indicating an upside potential of roughly 38.3% from current levels.
On the date of publication, Aditya Raghunath 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.
