You'll wish you hadn't ignored Intel stock

Intel shares Intel Corp. (NASDAQ:INTC) rallied nearly 6% in trading on Monday and gained another 8% in after-hours trading, bringing the stock to levels around $22 per share. Intel stock is still down over 50% year to date. The recent surge now follows news that Intel has landed a manufacturing contract from Amazon for its foundry business, in which it will design and produce custom AI chipsets for Amazon's cloud division AWS. Intel will produce the special “AI Fabric Chip” for Amazon using its 18A manufacturing process, the company's most advanced chip manufacturing technology. Intel also hinted that more chip designs could come from AWS, including versions that will utilize Intel's upcoming 18AP and 14A processes. Separately, Bloomberg reported last Friday that Intel received $3.5 billion in grants from the Pentagon to make chips for the U.S. military, although Intel declined to comment on the Pentagon grants. The new orders represent a big opportunity for Intel. If the company executes its foundry plans well and delivers compelling new CPU and GPU chips, Intel could see nearly three-fold share price growth. However, if the company fails to execute on its plans, Intel stock could fall to $10.

Now, INTC stock has declined over the past 3-year period and the decline has been anything but consistent, with annual returns being considerably more volatile than the S&P 500. The stock's returns were 6% in 2021, -47% in 2022 and 95% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is significantly less volatile. And it has outperformed the S&P 500 every year in the same period. Why is that? As a group, the HQ Portfolio stocks delivered better returns with less risk compared to the benchmark index; less rollercoaster riding as shown by the HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could INTC experience a similar situation as in 2021 and 2022 and perform worse than the S&P in the next 12 months – or will there be a recovery?

For years, Intel has faced growing frustration from investors as it has lost market share to AMD in the PC and server sectors. This is compounded by the industry's shift from CPUs to GPUs, especially in the era of generative AI, where GPUs are better suited to the compute-intensive tasks that AI requires. Recent successes with Amazon and the Pentagon could mark a turning point for Intel as generative artificial intelligence dominates the discussion in the computer and semiconductor markets. The Amazon deal in particular is seen as a strong vote of confidence in Intel's improved chipmaking capabilities, as AWS is the largest provider of public cloud services. Intel's foundry business, which has been at the heart of the company's problems, has lagged behind rivals such as Taiwan Semiconductor Manufacturing and Samsung. Intel's attempts to regain the lead in chipmaking have been very capital intensive and have been hampered by the company's manufacturing and design flaws. In fact, Intel has had to outsource production of some of its latest CPUs to TSMC. In 2023, Intel's foundry business reported an operating loss of $7 billion on revenue of $18.9 billion, highlighting the magnitude of the challenges it faced.

Much of the future of Intel's manufacturing roadmap depends on the success of the new 18A process. While production using this process is expected to begin in 2025, Intel announced in early August that it had achieved key milestones, noting that chips made using this process were on, booting Windows, and operational at Intel. Once Intel moves its latest server and PC chips to this process node and stops outsourcing chips to TSMC, we could see higher utilization rates, which would help reduce costs. Additionally, Intel stated that the first external foundry customer is expected to begin tape-out (transition from design to foundry for manufacturing) on ​​the 18A node in the first half of 2025. This could also drive the Intel revenue to a certain extent. A key challenge for Intel will be meeting production expectations at scale. However, there are encouraging signs here too. Intel recently said it had observed a defect density of 0.4 in the production process. Defect density refers to the number of defects per unit area on a wafer, and a value of less than 0.5 defects per square centimeter is considered favorable. Intel still has a few quarters to go before the production technology goes into mass production, which means the company could improve the technology even further.

We believe Intel's valuation is reasonable, with the stock trading at just under 20 times consensus 2025 earnings. Intel is taking its cost cutting much more seriously. The company intends to cut over 15% of its workforce, which could mean over 15,000 layoffs, while also aiming to cut costs by as much as $10 billion by next year. This could help drive the company's bottom line in the coming quarters as the next wave of CPU, GPU, and foundry bets come to fruition. We currently value Intel stock at around $30 per share, which is well above the current market price of $22 (based on Tuesday's premarket price). See our analysis of Intel Rating For more details on the factors influencing our price estimate for Intel, see. In this analysis, we also look at the catalysts for the recovery in Intel stock. Intel is a long-established company with a storied past and valuable expertise in a growing market. Our analysis suggests that a win is within reach – it might just require some patience.

While investors hope for a soft landing for the U.S. economy, the question is how bad things can get if another recession hits. Our How Low Can Stocks Fall During a Market Crash dashboard tracks how major stocks performed during and after the last five Market crashes.

Investing with Trefis Market-beating portfolios

See all Trefis Price estimates