Is Intel Stock a Buy After Earnings?

Intel INTC released its second-quarter earnings report on Aug. 1. Here’s Morningstar’s take on Intel’s earnings and stock.

Key Morningstar Metrics for Intel

• Fair Value Estimate: $21.00
• Morningstar Rating: 3 stars
• Economic Moat: None
• Morningstar Uncertainty Rating: High

What We Thought of Intel’s Q2 Earnings

• The company reported disappointing results while providing a gloomy third-quarter forecast, suspending its dividend, and outlining a hefty cost-cutting program considering softer demand.
• The firm shifted production of its latest PC processors from a low-volume (but lower-cost) facility in Oregon to its high-volume (but much higher-cost, for now) plant in Ireland. Intel thinks this was the proper long-term shift, but we fear it rushed this processor (formerly codenamed Meteor Lake) to prime-time production amid intense competition for the artificial intelligence PC, perhaps speaking to the relative lack of competitiveness of prior-gen CPUs.
• Intel is seeing an inventory buildup for both PC CPUs and CPUs used in servers--the latter due to a capital expenditure mix shift at cloud companies toward AI servers. Given Intel’s high fixed costs and massive manufacturing transitions, any revenue shortfalls leave the firm with nowhere to hide on the profitability front next quarter.

Fair Value Estimate for Intel

We have cut our fair value estimate to $21 from $30 and do not see the selloff as a buying opportunity, as we are concerned about Intel’s competitive positioning. Even though Intel is doing the proper work to focus on leading-edge chip manufacturing, it appears that many of its customers in various end markets might be leaving Intel behind.

Intel’s revenue fell 14% in 2023, due to a significant pause in PC spending after a couple of strong years of upgrades during the covid-19 pandemic, but also because of market share losses and more cautious spending among data center customers. We don’t foresee a huge rebound in 2024, and we model a further decline of 3.5%. We anticipate that Intel will achieve only 1.5% revenue growth in PC CPUs in 2024, and we still expect it to earn $0.5 billion in AI accelerator revenue from its Gaudi products. However, spending on server CPUs has been muted, as cloud customers have focused their spending on AI accelerators (mostly from Nvidia NVDA) instead. Meanwhile, its ancillary businesses will face severe headwinds in telecom spending, which will weigh on overall growth.

Read more about Intel’s fair value estimate.

Economic Moat Rating

We do not assign Intel a moat. The company’s returns on invested capital have fallen in recent years, and the firm did not earn excess returns on capital in 2022, nor do we expect it will do so in 2023. The deterioration stems from the firm’s manufacturing struggles and hefty investment phase in new manufacturing processes. We don’t believe the company will generate excess returns on capital in the next three to five years (even when considering government subsidies and other incentives). We are also not entirely confident in excess returns on capital looking five to 10 years out if its research and development efforts are unsuccessful, again given the capital-intensive nature of cutting-edge chip manufacturing. If Intel perfectly executes its aggressive technological roadmap, it may warrant a moat in the future. The company is currently on track to do so, but it has stumbled before, and we would like to see further progress before we award it a narrow moat again.

Read more about Intel’s economic moat.

Financial Strength

Intel is in a difficult financial position, in our view, based on its recent inability to generate free cash flow and its aspirations for hefty capital investments into its next wave of chip manufacturing across the globe. As of March 2024, Intel held $21.3 billion of cash and investments, compared with $52.4 billion of debt. Intel was regularly earning $10 billion-plus of free cash flow per year in its heyday but burned $9 billion in free cash in 2022 and almost $12 billion in 2023. Intel slashed its dividend in 2023 and will pay out about $2 billion in 2024, compared with $5 billion-$6 billion per year in the past.

Read more about Intel’s financial strength.

Risk and Uncertainty

We assign Intel a High Uncertainty Rating. The firm continually faces execution risks associated with keeping pace with Moore’s Law and creating cutting-edge processors, both in terms of chip design and chip manufacturing. On the latter front, Intel stumbled in recent years, causing the firm to lose market share and suffer notable operating losses. We foresee execution risk associated with Intel’s aggressive plans to achieve five processor nodes in four years by the end of 2025.

Read more about Intel’s risk and uncertainty.

INTC Bulls Say

• Intel is one of the largest semiconductor companies in the world and holds the lion’s share of the PC and server processor markets.
• Intel is making some smart moves in its turnaround plans, such as shedding noncore businesses, spinning off shares of its attractive automotive business (Mobileye), and seeking innovative co-investment partnerships with financial firms.
• The AI semiconductor market is booming, and Intel is one of the few merchant firms with a diverse enough portfolio to serve a larger portion of the market.

INTC Bears Say

• Intel encountered significant manufacturing delays in years past, and there is no guarantee that it can execute well in its aggressive aspirations to develop five process nodes in four years.
• Even if Intel can regain manufacturing parity with Taiwan Semiconductor, AMD is currently a far more credible chip designer in the x86 space for PC and server CPUs.
• Nvidia’s GPUs have captured most of the AI accelerator market, and cloud computing spending may continue to shift toward these GPUs away from Intel’s products over time.

This article was compiled by Leah Breakstone.