Intel Corporation (INTC), once the undisputed leader in the semiconductor industry, has recently faced significant headwinds, as evidenced by its disappointing Q2 2024 earnings report and weak Q3 guidance. The tech giant’s struggle to maintain its market position amidst fierce competition is reflected in its 60.25% year-to-date decline, indicating investor dissatisfaction.
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Given its recent performance and significant challenges coming ahead, I am neutral on Intel stock.
While the company’s restructuring efforts and cost-cutting initiatives promise a potential turnaround, the execution risks and ongoing market share losses to competitors suggest a cautious outlook. Intel’s ability to successfully implement its IDM 2.0 strategy and regain technological leadership will be crucial in determining its future trajectory.
Q2 2024 Earnings Breakdown
First, we need to look at Intel’s second-quarter results. The company reported revenue of $12.83 billion, a 1% decrease year-over-year. This might not sound too bad, but it fell short of analysts’ expectations of $12.94 billion. It’s worth noting that this was still within the range Intel provided in May after it received notice of export license restrictions affecting its China business.
However, the earnings narrative is even more sobering. Intel reported an adjusted EPS of $0.02, significantly lower than the $0.10 analysts expected. This is a pretty substantial miss and indicates some serious profitability challenges.
As expected, the market’s reaction to these results was swift and severe, with Intel’s stock plummeting 32.46% in after-hours trading following the announcement.
This decline adds to an already difficult year for Intel shareholders as the stock trades at a premium to the industry, with a P/E ratio of 74.02.
Adding to the bearish sentiment, Goldman Sachs maintained its “Strong Sell” rating and lowered its price target from $29 to $22, while Raymond James downgraded to “Hold.” At the same time, B of A Securities dropped to “Sell,” reflecting growing skepticism.
Factors Contributing to the Disappointment
The bearish narrative continues, and even with the booming AI industry, which created a massive demand for specialized chips, Intel has struggled to capitalize. This is evidenced by the loss of market share to competitors like AMD (AMD) and Nvidia (NVDA) which continue to dominate the server CPUs and AI accelerator space.
Also, Intel’s efforts to compete in this arena have been less successful, with its AI-focused products failing to gain significant traction. This has left Intel on the sidelines of one of the fastest-growing segments in the semiconductor industry, which is expected to reach $400 billion in annual sales within the next five years.
In addition, the company’s delays in advancing its manufacturing processes by transitioning to smaller process nodes, particularly the 10nm and 7nm technologies, are noteworthy. This setback has allowed rivals like TSMC to take the lead in advanced chip manufacturing, with TSMC (TMC) now producing chips at 3nm while Intel is still working on its 7nm (rebranded as Intel 4) process.
Intel’s Response and Strategic Moves
With the gravity of the situation, Intel’s leadership has unveiled a series of bold measures aimed at streamlining operations and positioning the company for future growth. At the forefront of Intel’s response is an ambitious cost-cutting plan to save $10 billion by 2025, signaling a serious commitment to financial health and efficiency.
Intel’s difficult decision to reduce its workforce by 15%, cutting approximately 15,000 jobs, and the suspension of its dividend, starting in the fourth quarter of 2024, might be necessary moves to align Intel’s cost structure with its new operating model and focus resources on critical areas.
CEO Pat Gelsinger acknowledged the pain of these decisions, stating, “This is an incredibly hard day for Intel as we are making some of the most consequential changes in our company’s history.”
Despite these cost-cutting measures, Intel remains committed to its IDM 2.0 strategy. Gelsinger emphasized the importance of this strategy, stating, “We must continue to drive our IDM 2.0 strategy, which remains the same: re-establish process technology leadership; build world-class packaging and foundry services; and deliver leadership products in every category in which we compete.”
Potential Paths to Recovery and Future Outlook
If executed effectively, Intel’s ambitious $10 billion cost-cutting initiative could significantly improve the company’s financial health, creating a leaner, more agile organization and potentially boosting profit margins. For context, Intel’s operating margin in Q2 2024 was a mere 0.2%, compared to AMD’s (AMD) 22%.
Intel’s IDM 2.0 strategy, which includes becoming a world-class foundry for both internal and external customers, aims to capture the global semiconductor foundry market, which is expected to reach $102.4 billion by 2032, growing at a CAGR of 7.5%.
Its custom silicon deal with Microsoft (MSFT) for its 18A process node could substantially boost its revenue. It is also making concerted efforts with the Gaudi3 AI accelerator, set to launch in Q3 2024, which could capture a larger share of the growing AI chip market.
With the global PC market delivering its second consecutive quarter of growth in 2024, representing a 3.0% year-over-year increase, Intel forecasts that AI PCs will grow from less than 10% to over 50% by 2026. This growth, driven by an anticipated Windows 11 refresh cycle and the emergence of AI PCs, could provide a tailwind for Intel’s core business.
However, its guidance for the third quarter of 2024 has raised eyebrows, as it falls significantly short of analysts’ expectations of $13.12 billion. The company is projecting revenue between $12.5 and $13.5 billion for Q3.
Intel has also forecast an EPS between $0.03 and $0.00, highlighting the firm’s profitability challenges. INTC has indicated that meaningful improvements in profitability may not be visible until late 2025 or even 2027.
Is Intel Stock a Buy, According to Analysts?
According to the latest analyst ratings, Intel (INTC) has a consensus Hold rating. Out of 30 analysts covering the stock, three rates it a Buy, 22 a Hold, and five a Sell. The average 12-month price target of $27.82 implies a potential upside of around 41.15% from the current price of $21.48.
Conclusion
Intel faces significant challenges but is taking bold steps to turn things around. While restructuring and strategic initiatives offer hope, execution risks and competitive pressures remain high. Given these factors, I remain neutral on Intel stock. The company’s future hinges on successfully navigating its ambitious recovery plans and regaining technological leadership. I recommend watching closely from the sidelines and seeing if the company can fulfill its ambitious plans soon.
