Intel (NASDAQ:INTC) used to be the undisputed leader in chip-making. However, the 2020s have not been so kind. AMD started gaining CPU market share against Intel during the pandemic years and they quickly got better–in terms of value–to the point where Intel was in serious danger of losing its CPU market leadership to AMD. It still is, but the CPU market has been on the backburner since AI started taking over.

AMD was already trouble enough for Intel, and the stock traded around $27 to $30 for a few months before ChatGPT’s release gave investors enough optimism to push it higher–at least for a while before they realized the competition Intel was facing in the AI field. The rising tide mostly lifted Nvidia–including some AI pick-and-shovel AI stocks–and AMD to some extent. It’d be appropriate to say that Intel basically drowned in the tide.

It went from being the go-to semiconductor stock to a legacy company playing catch-up.

Now, it’s impossible to discuss any of the big chip stocks without talking about Nvidia. Nvidia has always been making the best GPUs, and it found itself in a perfect spot to capitalize when the AI chip market ballooned–and ballooned it did. If anyone talks about chips nowadays–outside of niche circles–they’re probably talking about ones that are meant for AI usage. AI chips include graphics processing units (GPUs), field-programmable gate arrays (FPGAs), and application-specific integrated circuits (ASICs). They also use CPUs to some extent, but it’s becoming irrelevant as AI models and chips get better. Intel has been making “AI chips” for a while, but they’ve always been behind in this regard. Intel’s main focus was always the CPU market, and they doubled down on it as AMD started to eat more market share. Then, they changed gears again during the AI boom and they’re now trying to catch up with Nvidia and AMD.

Pat Gelsinger’s arrival as CEO in 2021 was supposed to be the turning point—a man returning to save the company he once helped build. His “IDM 2.0” strategy promised a renaissance, with plans to invest billions in manufacturing capabilities and reclaim technological leadership. But promises and reality have been two very different things so far.

That’s basically how Intel has gotten to where it’s at. The stock is at $24 as of writing and is up 30% from its trough. Can it go up from here, or will this rally die out just like it did during the start of the year? We’re going to have to dig deeper than that. Let’s start with the most critical aspect: understanding the business itself.

How Intel’s Business Works

Intel’s business is structured around two main pillars: Intel Products and Intel Foundry. They also own Altera, Mobileye, and some other companies. Here’s a quick glance into how they performed in Q3:

Let’s talk about Products first.

Intel Products is divided into three groups: Client Computing Group (CGC), Data Center and AI (DCAI), and Network and Edge (NEX).

Client Computing Group (CGC): This is Intel’s bread and butter. It contributed $7.3 billion of Intel’s $13.3 billion Q3 revenue. It’s what most people associate with Intel–the Core processors, for example.

Intel’s flagship product line includes the Core i3, i5, i7, and i9 processors. It has also been selling AI PCs. They are a new generation of PCs that are more fine-tuned for AI and have a neural processing unit (NPU) to handle AI models locally. Intel has shipped over 15 million AI PCs powered by its latest Core Ultra processors. They’re targeting 40 million by the end of 2024 and over 100 million by the end of 2025. The CCG also includes adjacent products such as modems, Bluetooth, and Wi-Fi technologies.

Data Center and AI (DCAI): The DCAI group is where Intel competes in the high-performance computing space. In Q3 2024, this segment generated $3.3 billion in revenue. This is a 9% increase from the previous quarter. This growth is mainly driven by the demand for data center solutions. Xeon processors have long been the standard for data centers worldwide. The next-generation Xeon processors—Sierra Forest (E-cores) and Granite Rapids (P-cores)—are set to launch in 2024 and 2025 respectively.

In addition to Xeon CPUs, Intel has been developing its own AI-specific hardware with the launch of its Gaudi 3 AI accelerator. It promises to deliver twice the performance per dollar compared to Nvidia when it comes to both inference and training AI models.

Network and Edge Group (NEX): The NEX group focuses on networking hardware and edge computing solutions—areas that are becoming increasingly important as more devices are connected through IoT (Internet of Things) networks. NEX generated $1.5 billion in Q3 2024. One of NEX’s most notable contributions is its range of Ethernet solutions optimized for AI. Intel also has infrastructure processing units (IPUs) that help offload networking tasks from CPUs in data centers. These products are essential as more businesses adopt edge computing to process data closer to where it is generated.

Now, let’s look into Intel Foundry Services.

IFS wants to manufacture not just Intel’s own chips but also for external customers. Intel isn’t as reliant on external semiconductor manufacturers as some other fabless companies, so they’re trying to put this manufacturing capacity to good use. It has a plan called “five nodes in four years,” which aims to catch up with competitors like TSMC. The most significant milestone here is the development of their cutting-edge process node—Intel 18A, which is expected to be production-ready by late 2025. IFS has already secured several high-profile customers interested in using its advanced packaging technologies like EMIB (Embedded Multi-die Interconnect Bridge).

As I said before, Intel also owns Mobileye and Altera. Mobileye makes driver assist technology; Alteryx does data analytics.

How has Intel Been Doing Financially?

If I were to put it simply: not so well.

Revenue was down 6% year-over-year at $13.3 billion. This decline was driven by a 7% drop in CCG revenue and a staggering 79% plunge in external foundry revenue, even though DCAI managed a 9% uptick.

Profitability took an even harder hit. Gross margins plummeted to a dismal 15% against the 42.5% reported in Q3 2023. The company attributed this primarily to “non-cash impairments and the acceleration of depreciation for certain manufacturing assets, a substantial majority of which related to our Intel 7 process node.” Adding insult to injury, the company posted a net loss of $16.6 billion; this loss is a sharp reversal from the $297 million profit the same quarter last year. This translates to a diluted loss per share of $3.88. Ouch.

This poor performance wasn’t confined to just Q3. If you zoom out, the debt and the cash flow trends are very bearish. It will likely continue to be this way as Intel spends more on catching up.

The nine-month figures for 2024 are also troubling. While revenue year-to-date (YTD) is roughly flat compared to the same period in 2023 at $38.8 billion, profitability and earnings are severely down. YTD gross margin is 30.3% (down from 37.8% in 2023), operating income has swung to a $12 billion loss, and the company has a net loss of $18.6 billion.

Cash flow has also deteriorated. Q3 operating cash flow declined 25% YoY to $5.1 billion and adjusted free cash flow remains deeply negative at $(0.7) billion. While the company continues to tout its IDM 2.0 strategy, its high capital expenditure needs (CapEx was $17.3 billion for the nine months ended Q3 2024), and ambitious plans to ramp up foundry services, coupled with soft demand and product delays have made generating significant positive cash flow difficult to achieve.

These challenges clearly raise concerns about the timeline and ultimate success of Gelsinger’s turnaround plan. Whether Intel can reclaim process leadership with its “five nodes in four years” objective and execute the IFS strategy remains open to question in the wake of continued weak financial results. The significant valuation allowance of $9.9 billion against net deferred tax assets–indicating the likelihood the tax assets will not be able to be used–recorded by the company in Q3 further complicates investor sentiment for the future of the business.

Accounting Standards Codification (ASC) 740 requires companies to reduce a deferred tax asset if there’s more than a 50% chance that asset won’t be realized “based on the weight of available evidence.” This $9.9 billion allowance means that–more likely than not–Intel isn’t turning profitable enough anytime soon to use these tax benefits.

If Intel becomes highly profitable again, they can absolutely use these tax credits; they’re just required by accounting rules to mark them as unlikely to be used right now because they don’t see enough near-term profitability to take advantage of them. Accordingly, my takeaway is that we should not expect Intel to pull off the sharpest of turnarounds.

Is Intel Stock Undervalued?

INTC stock has a forward PE of 27 times and a PS ratio of 1.9 times. These appear somewhat modest compared to historical averages and some industry peers. However, these seemingly attractive multiples can be deceptive.

Intel is betting big on a long-term turnaround by focusing more on manufacturing its own chips instead of just designing and letting others do it. It may eventually improve its profit margins, but it’s a gamble right now; Intel could regain its glory or end up worse off.

Here’s what analysts see so far:

There’s a chance Intel with keep up with the revenue estimates, but I’m not so sure about EPS, as Intel has consistently been missing those. In essence, the top line has likely bottomed; the bottom line is the new issue. The foundry division posted significant losses, including a $5.8 billion loss in Q3 2024 alone. As I said before, Intel is betting on the long term, and you shouldn’t expect solid profits in the near term.

What impact will this have on the price going forward?

The average 12-month price target for INTC stock is around $24.43, with a range between $18 and $28. Analysts basically see no upside here–on average, of course–in the next twelve months.

If you’re betting on making money through dividends or buybacks–you shouldn’t. Dividend payouts are going down and outstanding shares are rising.

This is the opposite of what a mature company should be doing. But again, this is just Intel trying to catch up to Nvidia and AMD and regain growth. No one can tell whether or not all these investments will end up being worthwhile.

So, Is Intel Stock Undervalued? Nope.

If you take a look beyond the forward PE ratio and stop associating Intel with other high-growth AI companies, the shares are not too undervalued. Does that mean Intel doesn’t have upside from here? Absolutely not. Intel could still surprise analysts going forward or the market could slap a higher premium on it regardless. Here’s what I see based on my research:

Is this worth chasing? Depends on you. For me, I would say no. My argument is that Intel has gotten way too invested in the AI race to a point where it will suffer disastrous consequences if it doesn’t pay off, and if it does pay off, I’d probably get better returns from other AI chipmakers; they all have much healthier balance sheets and margins.

That said, if you’re into turnaround plays–as Peter Lynch would like to call them–an INTC investment could play out well in the long run if the bull case turns out to be correct.

While I acknowledge the potential of INTC as an AI play, my conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than NVDA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None.