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This Company Could Ruin Nvidia

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This Company Could Ruin Nvidia

Everyone knows Nvidia (NVDA) is the top of the AI chip food chain.

But that may soon change.

The massive shortage in supply has created an opening that Intel (INTC) plans to step into.

Many analysts have dismissed this given Intel’s inability to do anything right fo the last 20 years.

But here’s why that could all change.

Intel’s Business

The days of ‘Intel Inside’ are long gone, but Intel is still a dominant player in the semiconductor market.

CEO Pat Gelsinger is working to effect a total company transformation with his 4 Years 5 Nodes strategy aimed at regaining transistor and power performance leadership by 2025.

Intel’s business breaks down as follows:

  • Client Computing Group (CCG) (57% of total revenues) – Focuses on processors for notebooks, desktops, and other devices, catering to the evolving demands of computing and connectivity.
  • Data Center and AI Group (DCAI) (29% of total revenues) – Provides solutions for data centers, cloud computing, and network infrastructure, emphasizing the integration of AI capabilities to enhance performance and efficiency.
  • Network and Edge Group (NEX) (9% of total revenues) – Targets telecommunications and IoT solutions, driving innovation at the network’s edge to process data closer to its source.
  • Intel Foundry Services (IFS) (2% of total revenues) – Offers semiconductor manufacturing services for external clients, leveraging Intel’s advanced process technologies.
  • Mobileye (4% of total revenues) – Specializes in self-driving technologies and driver-assistance systems, marking Intel’s footprint in the autonomous vehicle industry.

We want to focus on the Foundry for a moment.

This is the part of the supply chain where the chips themselves are made, something Taiwan Semiconductors (TSM) dominates.

Intel rolled out plans in February to become not only the No.2 foundry by 2030 but also launched its first systems foundry designed for the AI era.

And as shown below, the foundry business is a key growth engine.


Source: Intel Q4 2023 Financial Results

In fact, starting in Q2, Intel will produce 5,000 units annually of advanced packaging for Nvidia.

Within Intel’s DCAI, the company offers 5th Gen Xeon processors, which are optimized for AI workloads. 

On the CCG side, introducing the Core Ultra AI PC highlights Intel’s commitment to integrating AI across a broad spectrum of computing devices. 

This might sound like commonsense, but it is the first strategic shift for the company in four decades.



Source: Stock Analysis

Intel has gone through a monumental shift as its sales and margins cratered.

Revenues are back where they were in 2014 wth gross margins at their worst levels in decades.

However, management expects this to turn around in Q1 this year, with adjusted gross margins climbing to 44.5% from 38.4% the prior year.

This comes after Q4 2023 gross margins climbed to 45.7% with adjusted gross margins at 48.8%.

In 2023, Intel cut its dividend payouts after suspending share buybacks in 2022.

However, total tebt remains at a lofty $50 billion with net debt at $23.5 billion.



Source: Seeking Alpha

On an earnings basis, Intel appears expensive. But on a price-to-cash flow basis it’s reasonable at 15.7x.

Its closest peer, Broadcom (AVGO), trades at 30.4x cash flow.

High growth stocks like Nvidia are up in the 77.5x range.



Source: Seeking Alpha

Semiconductor companies have largely divided into growth and non-growth companies.

Intel and Micron (MU) fall into the non-growth category, with negative revenue growth over the last 3-5 years.

On the flipside, Nvidia and Advanced Micro Devices (AMD) have seen their fortunes soar.

This is what Intel hopes to change in the near future.



Source: Seeking Alpha

The big question is whether Intel can transform into growth mode while improving margins.

Currently, its got the worst profitability next to Micron.

Although it has shown signs of improvement, it’s still got a long way to go.

Our Opinion 5/10

Intel may be able to effect the change necessary to become a top competitor.

Yet, it’s mammoth size makes this a challenge.

Given its current share price and possible gains, we simply don’t see enough value here to jump on board.

If Intel executes its plans perfectly, it will be something between Nvidia and Taiwan Semiconductor at best.

We don’t see that giving shares enough of a boost from here relative to the risk.

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