Should You Hold Intel (INTC)?

Once the undisputed king of semiconductors, Intel (INTC) fights for its very existence.

While the company touts progress in AI-enabled PCs and advanced manufacturing processes, it must catch up to the rest of the industry. 

Its delayed chip releases and manufacturing missteps have eroded customer confidence. 

Competitors now routinely outperform Intel in benchmarks, threatening its core business.

But it wasn’t until the company suspended its dividend and planned mass layoffs that financial pros got worried.

According to our TrackStar data, financial pros began looking for information about Intel’s turnaround plans right after the company announced its earnings.

For a company that relied on its massive cash flow, investors now wonder whether they can change before it’s too late.

Intel’s Business

From desktop processors to data center solutions, Intel’s product range spans the computing spectrum. 

Yet, despite its broad reach, the company has stumbled in recent years, losing market share to nimbler rivals like AMD and facing manufacturing delays that have tarnished its reputation for innovation.

Intel segments its business into the following areas:

• Client Computing Group (58% of total revenues) – PC processors and related components, a segment under pressure from market saturation and competition.
• Data Center and AI (23% of total revenues) – Server platforms and AI accelerators, where Intel battles for dominance against NVIDIA and others.
• Network and Edge (11% of total revenues) – Network infrastructure and IoT solutions, a growing but fiercely competitive space.
• Intel Foundry Services (1% of total revenues) – A fledgling attempt to compete with semiconductor manufacturing giants like TSMC.
• Mobileye (3% of total revenues) – Autonomous driving technology, a bright spot in Intel’s portfolio.
• Other (4% of total revenues) – Various ventures, including the struggling non-volatile memory business.

Intel’s latest earnings report paints a grim picture: revenue down 1% year-over-year to $12.8 billion. 

In response, the company announced a drastic $10 billion cost-cutting plan, including laying off over 15% of its workforce. 

Source: Intel Q2 2024 Investor Deck

This belt-tightening comes as Intel desperately tries to catch up in the chip manufacturing race, pouring billions into its “five nodes in four years” strategy – the company’s plan to rapidly advance its manufacturing capabilities and close the gap with TSMC and Samsung by developing and deploying five generations of chip manufacturing processes in four years.

While the company has remained on track with its plan, with two of the five launched and shipping, many are skeptical, given Intel’s history with delays.

The real test comes when it produces at high volumes AND convinces customers to choose its products over the competition.

Financials

Source: Stock Analysis

Unlike other semiconductor companies, Intel has seen its revenues decline rapidly in recent years as margins eroded.

You need look no further than the total collapse of operating, profit, and free cash flow margin to see the impact.

Cash from operations plunged from over $35 billion in 2020 to just over $11 billion in the last year.

Meanwhile, CAPEX climbed from $14 billion to $24 billion during that same period, while total debt jumped from $37 billion to $53 billion.

No wonder the company cut its dividend and plans to shed employees.

Valuation

Source: Seeking Alpha

Ironically, Intel isn’t what you would call cheap.

Its price to cash flow is the lowest of the group. However, its P/E ratios are above the average for both GAAP and non-GAAP.

The abysmally low price-to-sales ratio of 1.5x suggests low confidence in the company’s future.

Growth

Source: Seeking Alpha

On this list, Intel is the only company with double digit sales loss.

Even Texas Instruments (TXN) has only seen sales slide in the low single digits.

Yet, none of these companies matches Intel’s massive decline in EBIT or net income over the last three years.

Profitability

Source: Seeking Alpha

Speaking of margins, only two companies on this list have negative free cash flow. And Intel is the only one teetering on a negative EBIT margin.

Unsurprisingly, Intel’s returns on equity, assets, and total capital are atrocious.

Our Opinion 2/10

We cannot recommend Intel for a few key reasons.

First, the turnaround plans require a massive amount of capital that is quickly dwindling.

Second, the company has a history of failing to reach its objectives that stretches back almost two decades now.

Lastly, even if it succeeds in reinventing itself, it still has to convince customers to choose them.

These headwinds are too great for us to jump on board with the stock.