Three Catalysts That Should Help Intel Stock Recover From Its Worst Crash Ever

Intel stock (NASDAQ: INTC) has dropped 35% over the past month and is down almost 60% year-to-date. In contrast, its competitor AMD (NASDAQ:AMD) has gained around 10% this year. Currently trading at about $20, Intel’s stock is at its lowest point in over a decade. Last month’s decline was primarily due to a disappointing Q2 report and weaker-than-expected guidance for Q3. Additionally, Intel has been losing market share to AMD in the PC and server sectors, while facing a broader industry shift from CPUs to GPUs in the generative AI era.

However, it looks like the bad news is already factored into Intel’s stock price, as it currently trades at under 19x consensus earnings estimates for FY 2025. We believe that Intel stock has bottomed out and we will focus this article on identifying potential catalysts that should drive a recovery for the stock.

Bringing The Foundry Business On Track With 18A Process

Intel’s recent struggles can largely be attributed to its missteps in the manufacturing space, where it has fallen behind foundry leader TSMC, which supplies competitors like AMD and Nvidia. In 2023, Intel’s foundry business reported an operating loss of $7 billion on sales of $18.9 billion. These losses stem from the company’s lack of competitive technology and its recent reliance on TSMC for some products, resulting in lower cost absorption.

However, things could improve as Intel rolls out its new 18A process, the company’s most advanced manufacturing technology to date. While production on this process is expected to begin in 2025, Intel announced in early August that it had reached critical milestones with chips made using the 18A process, noting that the chip had powered on, booted Windows, and was operational within Intel.  Once Intel transitions its latest server and PC chips to this process node, we could see higher utilization rates, which would help reduce costs. Additionally, Intel has secured multiple third-party customers for this new process, with the first external foundry customer expected to tape out (move from design to foundry for manufacturing) on the 18A node in the first half of 2025. This could also boost revenues to a certain extent.

Lunar Lake and Arrow Lake Make Intel Competitive In the CPU Market

While Intel’s CPUs have been losing ground to rival AMD in the PC and server space due to its manufacturing missteps, the company’s pipeline of new chips looks reasonably promising. Intel’s new Lunar Lake chip designed for laptops and ultra-compact devices as well as its Arrow Lake chip for desktops will be manufactured by TSMC using its advanced 3nm process. This could potentially put Intel ahead of AMD, which leverages TSMC’s older 4nm process node for its competing products. Intel’s latest server chips such as the Sierra Forest and Granite Rapids should also compete more favorably with AMD, using the new 3 nanometer “Intel 3” process node. The broader recovery in the PC market should also help Intel. Global PC shipments expanded 3.1% year-over-year in Q2 2024 reaching 62.5 million units, per Counterpoint. The ongoing recovery will likely get a further boost as AI-related PC software upgrades drive further growth. The mix of a broader market recovery and Intel’s new products could help drive revenue growth for Intel’s CPU business.

Gaudi 3 Chips Can Turn Intel Into A Notable Player In The AI Space

Artificial intelligence (AI) workloads demand substantial computing power and are resulting in a shift in the computing hierarchy from central processing units, like those made by Intel, to graphics processing units, which are primarily produced by Nvidia and, to a lesser extent, AMD. In AI servers, typically only one CPU is needed for every eight or more GPUs. This trend toward GPUs has negatively impacted Intel’s stock. However, Intel is aiming to increase its presence in the AI space with its Gaudi 2 and upcoming Gaudi 3 accelerators, which are designed for AI workloads in data centers. The company is focusing on competing on pricing, offering systems with eight Gaudi 2 accelerators for around $65,000 – about one-third the price of comparable platforms. Although Intel faces challenges, given Nvidia’s early lead and software ecosystem for AI development, the market could seek alternatives to Nvidia, given its high pricing.  Additionally, Intel is expanding its AI computing portfolio. Last month, the company provided details on a new AI chip for PCs, code-named Lunar Lake, which is expected to start shipping in Q3. The company expects to generate around $4 billion in AI chip sales in 2024,  with its latest Gaudi 3 chips likely to generate about $500 million in revenue. If sales surpass expectations, it could change the narrative around Intel’s AI bets and stock.

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 50% 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 NVDA, AAPL, and SPWR, and even for the mega-cap stars GOOG, TSLA, and MSFT.

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 19x consensus 2025 earnings. Intel is getting much more serious about its cost cuts. The company 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. This could help manage the company’s bottom line over the coming quarters as its next wave of CPU, GPU, and foundry bets potentially begin to bear fruit.

We value Intel stock at about $30 per share, which is well ahead of the current market price of $20. See our analysis of Intel Valuation for more details on what’s driving our price estimate for Intel.

[1] Returns as of 8/23/2024
[2] Cumulative total returns since the end of 2016

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