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The Stock of Intel Has Fallen Too Far, According to This Analyst

May 16, 2024
minute read

Intel Corp.’s stock has significantly underperformed this year, plummeting 37% in 2024 and lagging behind the PHLX Semiconductor Index by almost 60 percentage points. Against this backdrop, Wolfe Research analyst Chris Caso is softening his previously bearish stance. Although he still foresees challenges for Intel (INTC, 1.30%), the stock's recent weak performance has led him to upgrade his rating to a peer-perform from his previous underperform.

“Our cautious thesis played out, with limited margin improvement in 2024 and 2025 despite Intel’s achievement of its '5 nodes in 4 years' manufacturing strategy,” wrote Caso. “With sentiment and expectations now lower, we upgrade to [peer perform], but we still don’t see enough earnings power to support a favorable rating.”

Following this announcement, Intel shares rose about 1% in Thursday morning trading.

Caso's earlier concerns centered on Intel’s growth in server central processing units (CPUs) not being strong enough to offset the costs associated with its aggressive capital expenditures and depreciation. These expenditures are tied to Intel’s goal of delivering five process nodes in four years, a strategy the company believes is essential for re-establishing U.S. leadership in semiconductor process technology.

Recent disclosures from Intel have validated these cost concerns. The company revealed it does not expect its manufacturing to break even until 2027, and reaching profitability will depend heavily on expanding its foundry business by the end of the decade. Given that this information is now widely known on Wall Street, Caso believes that Intel might see some improvement in its gross margins next year and into 2026.

“While we do not think the story supports a positive investment thesis, we also believe the narrative is likely to improve from here, as [gross margins] are likely to begin improving more meaningfully in [calendar 2026], and investors will look to value the company on [calendar 2026] earnings,” Caso wrote.

Despite the severe drop in Intel’s stock price and the formidable challenges it faces, the current market sentiment and low expectations provide a less unfavorable outlook. Intel's future improvements in gross margins, particularly expected from 2026 onwards, might offer some relief and shift investor focus towards the company’s potential longer-term earnings.

Intel's "5 nodes in 4 years" plan is central to its strategy, but the heavy investment required has yet to yield immediate financial benefits. The anticipated profitability hinges on a substantial increase in foundry business, underlining the importance of this segment in Intel’s roadmap. While Intel's strategy aims to bolster the U.S.'s position in semiconductor technology, the financial strain and delayed breakeven point are critical concerns.

In summary, although Intel has faced significant stock performance issues and continues to grapple with high costs and delayed profitability, its aggressive manufacturing strategy and potential future margin improvements have led to a more neutral outlook from Wolfe Research’s Caso. While not yet a strong investment prospect, the company’s long-term narrative might improve, offering some hope for better performance down the line.

Cathy Hills
Associate Editor
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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