Potential Decline in Intel's Shares Worth $10.

Intel's stock has experienced a significant decrease of around 60% this year, attributable to various factors such as losing market share to competitors like AMD in both the PC and server sectors, the industry's shift towards GPUs in the era of generative AI, and manufacturing blunders. Despite these setbacks, we consider Intel's stock to be undervalued following the price drop, with our projected fair value of $27 per share representing a nearly 30% increase over the current market price. This assessment is primarily based on Intel's low valuation, potential regulatory advantages under the Trump administration, and the impending launch of its advanced 18A fabrication process, which could facilitate a turnaround in the stock's outlook. However, it's essential to acknowledge the risks involved, as there's a potential for further deterioration before improvement. Over the past month, Intel's stock has dropped by approximately 20%. In this analysis, we delve into how Intel's stock could potentially plummet by 50%, to roughly $10 per share, based on three significant variables: revenues, net margins, and price-to-earnings ratio. Additionally, a more pessimistic outlook from the Fed on the number of rate cuts has had a ripple effect on other market segments, including Bitcoin (as discussed in Could the Fed's Pessimism Slam Bitcoin Below $80,000?).

Revenues Are Showing No Signs of Recovery

Intel's revenue declined from $79 billion in 2021 to an estimated $54 billion in 2023, mainly due to a decline in CPU sales as a result of the decreasing demand in the post-Covid PC market and market share gains by rival AMD, alongside the emergence of more power-efficient and portable ARM-based chipsets. The rising demand for GPU chips for AI applications, an area where Intel has limited presence, further exacerbated the issue. Although the PC market is expected to show modest growth this year, Intel's revenue appears to be lagging behind, according to consensus estimates, projecting a 3% decrease in sales for this year and a 6% increase for the following year. There is a chance that Intel's revenue may stagnate during this period due to several factors.

Intel's Foundry Model: A Question Mark

Intel is banking on its foundry model, which involves using its manufacturing capabilities to produce chips for external clients, to revitalize its business. However, whether this strategy will yield success or not remains uncertain. The company's latest 18A process, its most advanced manufacturing technology to date, serves as the backbone of its foundry business. Although some positive developments have emerged in this department lately (as discussed in Is Intl Foundry Ready for a Comeback?), concerns surrounding Intel's internal execution capabilities persist. In the past, Intel's transitions to advanced process nodes were far from consistent, with the 10nm node experiencing considerable yield and manufacturing obstacles a few years ago. Similar problems may arise with the 18A process, prompting Intel to outsource a portion of its newer chip fabrication to Taiwan's TSMC. Intel's manufacturing defects cast doubt on its ability to reliably deliver chips for others at scale.

In early April, Intel announced that its CEO, Pat Gelsinger, who architected the foundry pivot, would be leaving the company. Separately, shareholders filed a lawsuit last week, alleging that Intel's top executives made misleading statements regarding its foundry business, violating federal securities laws. These developments do not instill confidence in the foundry business.

Intel's CPU Business Faces Imminent Threats

Intel's CPU business may face increasing pressure as AMD continues to make inroads in the data center and PC markets. The advent of the generative AI era could engender further competition, as PC manufacturers seek to incorporate more AI capabilities into their devices. ARM and Qualcomm are mounting a challenge in the PC space, while Microsoft's Copilot+ PCs are employing ARM chips that offer energy-efficient AI features.

On the server front, Intel could experience challenges due to accelerated computing servers, which are typically equipped with just one CPU for eight or more GPUs in AI servers. GPU manufacturers such as Nvidia are also playing a greater role in overall server system design, with the intention of replacing Intel's CPUs with lower-powered ARM chips instead of Intel's. This could potentially impact Intel's primary source of revenue.

Intel's Employee Morale and Customer Confidence Erode

Intel finds itself on the defensive. The company is attempting to regain momentum, but significant hurdles remain. Employee morale is unlikely to be high following a series of layoffs and cost-cutting measures. Furthermore, customers may be hesitant to commit to Intel's products and services in these uncertain times. The general public, too, may be less inclined to choose Intel if they perceive the company as not shaping the future of technology. In this climate, every task becomes more difficult. According to consensus estimates, Intel expects to generate approximately $52 billion in revenue for this year, and there is a possibility that sales could grow at a rate of just about 2% annually, reaching $54 billion by 2026, due to the factors mentioned above.

Intel's net margin percentages, calculated as net income divided by revenues, have been on a downward trend. They dropped from over 28% in 2021 (and previous years) to around 11% in 2022 due to reduced sales and market share. The decline continued in 2023, dropping to approximately 8.5% due to additional revenue losses and substantial losses in the foundry sector. There's even a possibility that margins could dive to around 5% in the near future.

Why this occurs

Several factors could contribute to Intel's declining margins. First, the expensive ramp-up for the new 18A process might prolong the time needed to achieve good production yields. Second, Intel's decision to outsource Arrow Lake chip production to TSMC may temporarily decrease the utilization of their own manufacturing facilities. Intel's manufacturing efficiency has been questioned in the past. In 2023, the foundry business reported an operating loss of $7 billion on $18.9 billion in sales, and is expected to see further revenue decreases and losses this year. Fierce competition in the CPU market, partially driven by newcomers like Qualcomm and ARM, could also force Intel to offer discounts, leading to reduced profits.

What effect does this have on Intel's valuation?

Currently, Intel's share price is approximately $20, translating to a multiple of around 19x for 2023 earnings and 20x for estimated 2025 earnings. If we assume annual revenue growth of about 2% between 2023 and 2026, paired with a decline in margins to around 5%, adjusted net income could plummet from $4.4 billion (or $1.05 per share) in 2023 to around $2.75 billion (or $0.66) in 2026, representing a 37% reduction compared to 2023. Difficult economic times can make investors anticipate even harder times, which could result in further downward adjustments to Intel's valuation multiples. For example, if investors decide to assign a multiple of 15x due to continued underperformance, this would equate to a share price of roughly $10.

The timeline of this negative-return scenario

While this example spans a 2026 timeline, the impact of these factors may manifest within two to four years. If the competitive threat materializes and Intel continues to struggle with manufacturing, we could see a substantial correction in the stock price.

The inconsistent decrease in INTC stock over the past 4 years

INTC stock returns have shown considerable volatility, compared to the S&P 500, with returns of 6% in 2021, -47% in 2022, and 95% in 2023. In contrast, the Trefis High Quality Portfolio, which includes a collection of 30 less volatile stocks, has outperformed the S&P 500 over the same period.

Investing in Trefis’ Market-Beating Portfolios

While Intel's future may require patience, rewarding opportunities could arise for those who remain patient investors and customers. We delve into the catalysts for Intel's stock recovery in our analysis. As a historic and knowledgeable company operating in a growing market, a turnaround is possible, albeit potentially not immediate.

The story provided contains information about Intel's net margins and their potential decline due to various reasons, such as expensive production ramp-ups, competition, and production inefficiencies. It also discusses how this could impact Intel's stock price and the risk involved in investing in the company.

The decline in Intel's net margins from over 28% in 2021 to around 8.5% in 2023, as discussed, contributes to the 'intel downside' some investors are experiencing. This dip in margins is attributed to factors such as the expensive ramp-up for the new 18A process, reduced sales due to market share losses, and increased competition in the CPU market. These challenges have resulted in Intel's stock ('INTC stock') experiencing a significant decrease, leading some investors to consider it undervalued at its current price.

Potential Intel Share Value Decrease Reaching $10