Intel Stock Could Dive To $10

Intel stock (NASDAQ:INTC) is at a low and things could get worse before they get better. 

Could Intel stock fall to $10 in the next few years from the roughly $20 level it is at currently? Does this sound a bit ridiculous?  Consider this – Intel stock was trading at around $50 per share, almost 2.5x the current value at the end of 2023, and the stock was trading at levels of about $60 per share back in 2021. Intel has been grappling with several issues, such as losing market share to competitor AMD in the PC and server space, the industry’s broader transition from CPUs to GPUs in the generative AI era, and significant manufacturing missteps. Below we examine a scenario where Intel stock falls by almost 50% from current levels, considering three key metrics, namely revenues, net margins, and price-to-earnings multiple.

The decrease in INTC stock over the last 3-plus year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 6% in 2021, -47% in 2022, and 95% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

Intel’s Revenues could languish around current levels

Intel’s sales have declined considerably of late. Intel revenues declined from $79 billion in 2021 to $54 billion in 2023 as Intel’s CPU sales declined due to the cooling off of the PC market post-Covid-19 and also due to market share gains by rival AMD. The rise in mobile devices and increasing demand for AI chips – areas where Intel has a limited presence – have also hurt. While the PC market is recovering with sales projected to grow by low single digits this year, Intel’s revenues don’t look like they will stabilize just yet, with consensus estimates projecting a 3.5% dip in sales this year.

Investors have been pinning their hopes on several factors to revive Intel’s revenue growth in the medium term. These include the launch of the next-generation server chips, such as Sierra Forest, and PC chips, such as Lunar Lake and Arrow Lake. Intel’s entry into the AI chip market and its implementation of the cutting-edge 18A process in its manufacturing operations are also seen as crucial to driving a recovery. However, there remains a possibility that Intel could see its revenues stagnate in the interim due to a host of factors.

Why?

Intel’s CPU business could face further pressure, despite new launches as the generative AI era could open the doors to more competition as PC makers look to incorporate more smarts into their devices. For instance, both chip-designer ARM and mobile chipset specialist Qualcomm are pushing into the PC space and Microsoft’s latest Copilot+ PCs use ARM chips that offer AI features and consume less power. On the server front too, there could be challenges as accelerated computing servers used for generative AI applications typically require just one CPU for eight or more GPUs in AI servers. Moreover, GPU makers such as Nvidia are playing a bigger role in overall server system design, looking to supplant CPUs from the likes of Intel with lower-powered ARM chips instead of Intel’s. This could impact Intel’s bread-and-butter CPU business.

There’s also a real possibility that Intel’s AI bets could falter. The company is aiming to expand its AI server business with the Gaudi 2 and upcoming Gaudi 3 accelerators for data centers. However, Intel faces a significant challenge from Nvidia which has a sizable lead in the space. Nvidia’s chips remain the gold standard in terms of performance and the company has been locking customers into its AI ecosystem with proprietary programming languages like CUDA making it difficult for new entrants like Intel to gain ground. Moreover, there is a possibility that Intel’s AI bets could also be poorly timed. Intel may be ramping up AI chip production at a time when the economy is slowing down, with AI model training – a computing-intensive phase – likely to transition to less intensive interfacing, reducing demand for GPUs.

There’s a chance that Intel’s big manufacturing turnaround also may not go entirely as planned. The company is betting big on its 18A process, its most advanced manufacturing technology to date. However, Intel’s recent track record of transitioning to more advanced process nodes has been weak. Case in point, the company struggled with its 10 nm node a few years ago, facing considerable yield and manufacturing setbacks and there is a possibility that we could see similar trends with the new process as well.

Intel is clearly on the back foot. While the company is keen to build momentum – employee morale can’t be high either. Customers and buyers are more likely to want the ‘best’ and if the word on the street is that Intel isn’t the ‘future’ – it’s less likely to be the choice ‘now’. Everything becomes just a tad harder. Intel revenues are projected at about $52 billion for this year per consensus estimates and there is a possibility that sales could grow at a level of just about 2% per year to about $55 billion by 2026, due to the aforementioned factors.

Intel’s margins could fall further

Intel’s adjusted net margins (net income, or profits after expenses and taxes, calculated as a percent of revenues) have been on a declining trajectory – they fell from levels of over 28% in 2021 (and in years before that) to about 11% in 2022 amid declining sales and market share losses. Adjusted net margins fell to just about 8.5% in 2023 due to further sales declines and considerable losses in the foundry business.  While the markets are likely betting that Intel’s margins could eventually expand to historical levels as it sets its product and manufacturing roadmap in order, there remains a possibility that margins could actually fall to about 5%.

Why?

Costs associated with the foundry ramp-up could hurt Intel’s bottom line. Moreover, Intel’s move to outsource production of its Arrow Lake chip to TSMC could potentially reduce the utilization of its own manufacturing facilities. Intel has also not exactly been known for production efficiency. For perspective, in 2023, Intel’s foundry business reported an operating loss of $7 billion on sales of $18.9 billion. Separately, higher competition in the CPU space – where new entrants such as Qualcomm and ARM – might also force Intel to resort to some amount of discounting. 

How does this impact Intel’s valuation? 

Now at the current market price of about $20 per share, Intel trades at about 19x trailing earnings. The number rises to 75x for 2024, considering that the company is expected to see profitability fall this year amid continued revenue contraction and transition to new product lines. So what explains the difference in Intel’s P/E multiple using 2023 and 2024 earnings? It’s because investors are betting that things will get better going forward. However, if Intel doesn’t deliver in the interim, investor sentiment could go further downhill.

If we combine the scenario we detailed above – which assumes just 2% annual revenue growth between 2023 and 2026 with margins falling to about 5% – this means that adjusted net income could fall from about $4.4 billion in 2023 ($1.05 per share) to about $2.75 billion in 2026 ($0.66), a 37% decline compared to 2023.  Bad times make it easier to imagine worse times – and when that happens, things can spiral causing investors to assign an even lower multiple to Intel re-assessing Intel’s recovery path. For example, if Intel’s investors assign a multiple of 15x following its continued underperformance, this would translate into a stock price of about $10 per share.

What about the time horizon for this negative-return scenario? While our example illustrates this for a 2026 timeline, in practice, it won’t make much difference whether it takes two years or four.  If the competitive threat plays out, with Intel also continuing to struggle with manufacturing, we could see a meaningful correction in the stock.

With all that being said, we do believe it pays to be patient – and patient investors and customers will be rewarded. We highlight the catalysts for Intel stock recovery in this analysis. This is a storied company with a glorious past and valuable know-how in a growing market. Our analysis suggests that a win will be at hand – it just may not be quick and may require patience. 

And it could be a bumpy ride for a while. There is certainly a case to be made for sizable long-term gains from Intel stock but the Trefis High Quality (HQ) Portfolio could be right up your alley if consistent outperformance is at the top of your list.

[1] Returns as of 9/4/2024
[2] Cumulative total returns since the end of 2016

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