Is Intel Stock a Buy Now?

It's been a challenging year for Intel (INTC). The company's stock price has dropped nearly 50% since the start of the year, and in November, Intel was removed from the Dow Jones Industrial Average index. To further complicate matters, Nvidia, a company Intel once aimed to acquire in 2005, has surged in value and is now the second-largest company globally based on market capitalization, taking Intel's place in the Dow.

As we look toward the new year, many are wondering if Intel can bounce back in 2025.

Intel's Challenges in 2024

A review of Intel's third-quarter results sheds light on the company's difficulties. For instance, Intel experienced a 6% decline in year-over-year sales and reported a significant change in earnings, going from an adjusted earnings per share (EPS) of $0.41 last year to a loss of $0.46 per share this year. A major factor impacting Intel is its third-party foundry business, launched in 2021, which has instead resulted in increasing losses.

In the latest quarter, the foundry division saw an 8% decrease in revenue year over year, totaling $4.4 billion, while operating losses expanded dramatically to $5.8 billion, up from $1.8 billion a year earlier. This included a hefty $3.1 billion impairment charge. Even setting aside that charge, the loss would have been $2.7 billion.

Looking forward, Intel is attempting to transform its foundry segment into an independent subsidiary to better serve its clients and attract external funding, possibly paving the way for a spin-off in the future.

Intel anticipates improved operating losses for its foundry business next year, as it shifts to more efficient production processes and implements cost-saving measures from its restructuring efforts. However, there is some unsettling news for Intel, as The New York Times reported that the Biden administration may reduce the company’s expected $8.5 billion grant under the CHIPs Act, while awarding a competitor, Taiwan Semiconductor Manufacturing, a $6.6 billion grant for developing foundries in the U.S. Recently, it was confirmed that Intel will receive $7.86 billion, alongside the $3.3 billion it already secured through a CHIPs Act funding contract with the Department of Defense.

Besides the foundry division, Intel's other business segments present a mixed picture. On a positive note, its data center and artificial intelligence (AI) sectors showed improvement, with revenue rising 9% year over year to $3.3 billion in the last quarter. However, this growth lags behind the broader data center industry's performance, and Intel admitted its new Gaudi 3 AI accelerator will not hit revenue expectations for 2024.

Meanwhile, after achieving robust results from its client computing group earlier in the year, which saw revenue growth of 31% in Q1 and 9% in Q2, the group reported a 7% revenue drop in Q3. Nevertheless, Intel is optimistic about upcoming product releases, specifically the Intel Core Ultra 200V Series processors—previously known as Lunar Lake—as a boost to its AI PC segment and Arrow Lake processors for desktop revenue growth. The company plans to release its first central processing unit (CPU) employing the new 18A technology, called Panther Lake, in the latter half of next year.

Other parts of Intel's business also struggled. The revenue from its Altera subsidiary fell sharply by 44% year over year, despite a sequential increase of 14% and a modest operating profit. The company is considering an initial public offering (IPO) for this division in the future.

As for Intel's Mobileye subsidiary, which focuses on chips for autonomous vehicles, its revenue dropped by 8%. Overall, the acquisitions of both Altera and Mobileye have not performed as expected.

Potential Value of a Breakup

Intel appears to be on a path toward breaking up its operations, which could be beneficial for investors.

Although the core product business is facing challenges, it remains solid with projections of approximately $12.6 billion in operating income this year, translating to about $2.20 in earnings per share. Based on a forward price-to-earnings ratio (P/E) of between 10x and 12x for the core operations, this suggests a stock price ranging from $22 to $26.

Despite the current struggles of the foundry sector, Intel possesses significant physical assets. The company reported about $104 billion in physical assets on its balance sheet and has invested roughly $68.5 billion in capital expenditures since 2021, primarily directed at this division. This substantial investment can help in valuing Intel's foundry business.

Nonetheless, Intel does carry $26 billion in net debt, which should also be considered in evaluating the foundry segment, potentially valuing it at about $10 per share after subtracting the debt.

Furthermore, Intel's nearly 88% stake in Mobileye could be valued at approximately $12.8 billion, translating to around $3 per share. The Altera division also retains some value.

In total, a restructured Intel could see its value rise to between $35 and $40 per share, representing significant upside potential from its current price. With the company pursuing measures to separate some of its businesses, Intel could indeed be seen as a worthwhile investment at present, setting up the potential for a rebound in 2025.

Intel, stock, Nvidia