Will Intel’s AI and Foundry Bets Reverse The Stock’s 38% Slump This Year?

Intel stock (NASDAQ: INTC)  has had a rough year, declining by about 38% since early January. In contrast, rival AMD stock (NASDAQ:AMD) has gained about 17% over the same period. While Intel’s financial performance is expected to improve this year as the PC market recovers from the post-Covid slump, investors appear to have a more cautious outlook on the company’s long-term prospects amid concerns about Intel’s ability to navigate the era of generative artificial intelligence. There are also doubts about whether Intel’s plans to become a major foundry player will come to fruition.

The big surge in interest in generative AI is seen as a net negative for Intel’s server business. While Intel has been losing a share of the server market to AMD amid its production missteps, the AI trend has resulted in surging demand for graphics processors that are tailor-made, instead of the central processing units that Intel sells, for compute-intensive AI workloads. Although central processors are typically paired with GPU chips in AI servers, only one CPU is typically required for multiple GPUs. Moreover, vendors such as Nvidia are looking to use lower-powered ARM chips instead of Intel’s chips in their systems.  There are challenges in the client side of the business as well. While Intel is still the market leader by far for PC chips, the AI era could open the doors to more competition as PC makers look to incorporate more AI into their devices. For instance, both chip-designed ARM and mobile chipset specialist Qualcomm are pushing into the PC space. For example, Microsoft’s latest Copilot+ PCs use ARM chips that offer AI features and consume less power.

Now Intel itself is looking to play a bigger role in the AI space with its Gaudi 2 and next-gen Gaudi 3 accelerators focused on AI workloads for data centers. The company appears to be focusing on competing on price, indicating that a system that includes eight Gaudi 2 accelerators sells at about $65,000, roughly a third of the price of other similar platforms. Intel also says that the upcoming Gaudi 3 can run model sizes similar to Nvidia’s H100, one of the most popular AI accelerators used by major AI startups, at a considerably lower cost. That said, Nvidia is likely to move ahead in terms of overall performance with its new H200 chip, which is likely to set the benchmark for accelerated computing. Intel has also been taking steps to boost its AI computing portfolio, providing details on a new AI chip for PCs code-named Lunar Lake last month, which is expected to start shipping sometime in Q3. However, Intel stock actually declined post these announcements, as the markets were likely not impressed.

Intel is also betting heavily on becoming a foundry player, producing chips for other semiconductor companies, and taking on the likes of TSMC and Samsung Electronics. However, the business is facing some challenges at the moment, due to Intel’s missteps which caused it to outsource a considerable amount of wafer production.  Intel reported an operating loss of $7 billion for its manufacturing division (which still primarily caters to its own chips) for 2023, and the company indicated that it doesn’t expect to break even until 2027. Intel has also fallen behind the curve in terms of manufacturing process technology and it remains to be seen if the company can catch up with the likes of TSMC. Intel could also face some uneasiness from potential customers relating to intellectual property relating to chip designs and strategy, considering Intel’s role as both a service provider and a potential competitor.

Now Intel stock has suffered a sharp decline of 40% from levels of $50 in early January 2021 to around $30 presently, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period. In comparison, Arista Networks (NYSE:ANET), a company that benefits from generative AI, has seen its stock surge by more than 300% over the same period. Arista is a market leader in high-speed networks catering to hyper-scalers and big corporations that are major stakeholders in the generative AI trend. Turns out, Arista is part of the 30-stock Trefis High Quality (HQ) Portfolio, which 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. Now, can Intel’s stock fare better going forward?

In the near term, Intel should benefit from the recovery in the PC market following a slump after the easing of Covid-19. IDC forecasts that PC shipments could rise 2% for this year. Intel’s growth could be better, as PC vendors worked through chip inventory that they built through the pandemic over the first few quarters of 2023. This could result in stronger demand for the likes of Intel as PC vendors replenish their inventory. Intel is also seeing interest from private equity players who want to participate in its manufacturing capacity expansion. In June, the company said that Apollo Global Management had agreed to invest $11 billion in the semiconductor company’s chip manufacturing plant in Leixlip, Ireland. Such deals could reduce the risks of the company’s foray into the foundry business. Intel’s valuation is also reasonable, in our view with the stock trading at about 28x consensus 2024 earnings and about 16x consensus 2025. We value Intel stock at $41 per share, which is about 30% ahead of the current market price. See our analysis of Intel Valuation for more details on what’s driving our price estimate for Intel.

[1] Returns as of 7/1/2024
[2] Cumulative total returns since the end of 2016

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