Has Intel Got What It Takes To Compete In The AI Era?

Intel stock (NASDAQ: INTC) posted a weaker-than-expected set of Q2 2024 earnings last week, and provided a tough outlook for Q3, guiding revenue of $12.5 billion to $13.5 billion, well below estimates of over $14 billion, as it continues to lose market share in both the PC and server space. Following the tough earnings report, Intel noted that it intends to cut over 15% of its workforce, which could amount to over 15,000 layoffs while aiming to slash costs by as much as $10 billion by next year. While these steps will help Intel manage its profitability, the key challenge will be scaling up its revenues at a time when generative artificial intelligence dominates the computing and semiconductor market narrative.

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. However, Intel has a lot of catching up to do as it expects to sell just about $500 million worth of its Gaudi AI chips this year, while Nvidia has been shipping over $20 billion worth of chips each quarter. Nvidia is also set to move further ahead in terms of overall performance with its new H200 chip, which appears to set the benchmark for accelerated computing. Nvidia has also been looking to lock customers into its AI ecosystem with proprietary programming languages such as CUDA and this could prove an obstacle for companies like Intel which are just entering the market. 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.

We also believe that there is a possibility that Intel could be ramping up its AI chip capacity at a time when the demand outlook appears mixed with the broader economy slowing down with weak U.S. jobs reports stoking fears of a recession. Moreover, the demand for AI chips on the server side could be considerably front-loaded, as the initial phase of training AI models is more of a one-time affair that is extremely computing power-intensive calling for substantial computing capacity and GPU resources. After the training phase, the trained models are deployed in real-world applications and services. At this stage, the utilization of these models may shift toward lower power requirements or even on-device capabilities, reducing the growth in GPU demand.

Intel’s weaker manufacturing technologies pose significant long-term challenges for the company in the competitive AI sector. Unlike Intel, its rivals AMD and Nvidia are fabless companies that rely heavily on TSMC, which utilizes the most advanced production processes available. Although Intel plans to partner with TSMC for some AI projects, it remains to be seen how well Intel will be able to produce AI chips, given its substantial investments in establishing itself as a foundry player.

Now INTC stock has suffered a sharp decline of 55% from levels of $45 in early January 2021 to around $20 now, vs. an increase of about 45% for the S&P 500 over this roughly 3-year period. However, the decrease in INTC stock has been far from consistent. Returns for the stock were 6% in 2021, -47% in 2022, and 95% 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 mega-cap 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 recovery?

We believe that Intel’s valuation is reasonable post the sizable sell-off, with the stock trading at just about 16x consensus 2025 earnings. Intel could benefit from the continued recovery of the PC market besides seeing potential gains on the client side of the AI revolution, given its deep relationships with PC vendors. We value Intel stock at about $30 per share, which is well ahead of the current market price of $21. See our analysis of Intel Valuation for more details on what’s driving our price estimate for Intel.

[1] Returns as of 8/5/2024
[2] Cumulative total returns since the end of 2016

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