Will Intel Stock Recover To Pre-Inflation Shock Highs?

Intel stock (NASDAQ:INTC) currently trades at $47 per share, about 31% below the levels of almost $68 seen on April 9, 2021 (pre-inflation shock high).  Intel has seen demand pull back as the PC market has declined meaningfully after seeing a big demand surge through Covid-19. Moreover, the increasing prominence of graphics processors also appears to be threatening Intel as these chips – which are seen as core to artificial intelligence-related workloads – could make the CPU’s Intel sells less prominent in the AI era. That said, Intel stock has recovered by over 80% from a low of $25 seen on October 11, 2022. This has been driven by signs that the PC market could be picking up. Moreover, Intel’s push into the foundry space is also gaining traction. Over Q3, the company said that the business signed up three new customers, and generated $311 million in revenue, marking a 299% increase from the same period last year.

Looking over a longer period, INTC stock has seen little change, moving slightly from levels of $50 in early January 2021 to around $45 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. Overall, the performance of INTC stock with respect to the index has been quite volatile. Returns for the stock were 3% in 2021, -49% in 2022, and 90% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that INTC underperformed the S&P in 2021 and 2022.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, 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. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could INTC face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Now, returning to the pre-inflation shock level would mean that Intel stock will have to gain about 46% from here. However, we estimate Intel’s valuation to be around $38 per share, slightly below the current market price, due to a risk of headwinds from an uncertain macro environment and mounting competition from the likes of AMD in the server processor market that the company currently dominates. Our detailed analysis of Intel’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, although another rate hike remains in the cards.

In contrast, here’s how Intel’s stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Intel and S&P 500 Performance During 2007-08 Crisis

Intel stock declined from a little over $26 in September 2007 to just $12 as of March 2009 (as the markets bottomed out), implying INTC stock lost nearly 52% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $20.40 in early 2010, rising roughly 60% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Intel Fundamentals Over Recent Years

Intel’s revenues rose from around $72 billion in 2019 to about $79 billion in 2021 led by surging demand for computing products through the early phase of the Covid-19 pandemic. However, sales declined considerably over 2022 to about $64 billion, as demand, particularly for the company’s client computing group, cooled off with PC sales moderating post-Covid-19 lockdowns. Intel’s earnings also declined from around $4.77 per share in 2019 to under $2 in 2022 due to the decline in sales.

Does Intel Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Intel’s total debt has increased from $29 billion in 2019 to $49 billion now, while its total cash stood at a little over $24 billion. It also garnered about $15 billion in cash flows from operations in 2022. The company’s financial position is reasonably healthy, and it appears to be in a good position to meet its near-term obligations.

Conclusion

While Intel stock could benefit from easing inflation and the Fed’s recent indication that it could cut interest rates over the next year,  strong competition in the CPU market and the rising prominence of GPUs could limit the upside. 

[1] Month-to-date and year-to-date as of 1/6/2024
[2] Cumulative total returns since the end of 2016

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