Intel is staring down multiple challenges that could fundamentally change the company as we know it. To say I'm surprised by its stock recovery would be an understatementsince early February, Intel has outperformed its semiconductor peers by a wide margin. The return of Lip-Bu Tan as CEO, after his abrupt resignation in August 2024 over issues like a bloated workforce, a cautious approach to innovation, and an underperforming AI strategy compared to NVIDIA's clear dominance, has certainly stirred things up. Tan's comeback has reignited investor enthusiasm, even though I'm still cautious about whether his leadership will deliver sustained gains. After all, he wasn't entirely unhappy with how Gelsinger was running things, particularly regarding the manufacturing strategy. That said, I must give credit to Tan's stellar track record as CEO at Cadence, where his leadership drove a surge in value exceeding 3,000%.

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However, investors should keep in mind that turnarounds take time, no matter how much was done by previous leadership. While Tan is undoubtedly a respected veteran with deep relationships across the semiconductor value chain, I believe that the initial euphoria is already priced into the stock and that the market will become more cautious moving forward. In this article, I'll outline my doubts and explain why, at this moment, I'm not fully buying into the hype around Intel.

Thoughts on the New CEO

Intel is staring down multiple challenges that could fundamentally change the chip company as we know it today. The recovery in Intel's stock has been surprisingsince early February, Intel has outperformed its semiconductor peers by a significant margin. The return of Lip-Bu Tan as the new CEO on March 18, 2025, has rekindled his relationship with the board following his abrupt resignation in August 2024, when he was reportedly dissatisfied with Intel's bloated workforce, overly cautious approach to innovation, and an underperforming AI strategy compared to NVIDIA's clear dominance. Although Tan's comeback has sparked renewed optimism and pushed the stock higher by over 10%, I remain skeptical about whether his leadership will generate sustained gains, especially since he wasn't entirely unhappy with how Gelsinger was steering the company away from his key manufacturing strategy. However, I must give due credit to Tan's proven track record as Cadence CEO, during which the company's value surged by more than 3,000%. Investors should remember that turnaround efforts take time, regardless of past achievements, and while Tan is a highly respected veteran with deep industry relationships, I believe the initial euphoria has already been priced into the stock.

Intel's Strategic Dilemma

Tan's return to the board also means that he isn't entirely opposed to the manufacturing strategy that Gelsinger implementedto reshape Intel's semiconductor fabrication into a foundry service for external customers. This plan, however, should raise a red flag for Intel investors. Manufacturing chips is an enormous expense that Intel currently struggles to sustain, a view shared by many industry leaders and analysts. Despite early-stage discussions with competitors like Broadcom, Qualcomm, GlobalFoundries, and TSMC, a deal to sell all or part of Intel's business appears unlikely in the near term. In my opinion, a more realistic outcome might be a joint venture, perhaps with TSMC, which has recently floated the idea of a potential partnership regarding Intel's chip-making business. Such a joint venture could help reorganize Intel's struggling foundry segment, which has incurred massive losses. For context, Intel's foundry lost $8.1 billion in 2024 on a gross margin basisbefore considering $5.4 billion in operating expenditurescompared to a loss of $2.6 billion the previous year. Alternatively, a spin-off might be on the table, with Intel retaining a majority stake, but if a joint venture does not materialize, Intel may face even tougher competition, especially as TSMC looks to invest more aggressively in U.S. production, fueled in part by policy initiatives like the CHIPS Act now under intense government scrutiny.

Financial Performance and Margin Pressures

Intel's disappointing execution in the data center chip market, coupled with its failure to develop competitive GPUs, has led to a significant contraction in operating cash flow over the past couple of years. Since 2020, Intel's operating cash flow has dropped by 77%, and the company has experienced three consecutive years of negative adjusted free cash flow. The enormous losses in the foundry business further compound these issues, making it increasingly difficult for Intel to steer its overall business toward profitability. The new CEO, Tan, has an opportunity to turn the struggling chip maker around, but he will need to act decisively to cut losses and reduce cash burnpossibly by slashing the bloated employee base once again. Intel recently announced a massive restructuring in August, cutting roughly 15% of its 125,000 employees, though these disruptive cuts might not help attract top talent.

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The decline in top-line revenue forecastsfrom over $60 billion in early 2024 to below $54 billion nowreflects these ongoing challenges, as Intel lags behind competitors like NVIDIA and AMD, and even loses market share in the CPU, GPU, and data center markets. For instance, Intel's x86 CPU market share fell to 75-80% in 2024 from 82% in 2023, while AMD and Apple's in-house chips have further eroded Intel's presence. In the GPU space, Intel is far behind NVIDIA's ~88% market share, and alternatives like ARM chips, AWS Graviton, and Google TPUs are gaining traction.

From a margin perspective, Intel's performance has been disappointing. Historically, Intel's gross margins ranged between 55-60%, but this year they have fallen sharply to 33.8%. The new CEO has hinted at further restructuring to address a bloated headcount of 105K, a number that far exceeds the approximately 30K employees at competitors like NVIDIA and AMD. Although Intel's chip design business does not encompass the entire employee base, the overall high headcount is unsustainable. With declining revenue expectations and mounting pressure to reduce costs, Intel's management likely faces another 18+ months of restructuring before the turnaround can be considered effective. The new CEO must quickly address the foundry challenges, possibly by divesting or restructuring that segment, and resolve the AI GPU issues before the stock can become attractive. While there is some hope that improved operations, along with $8 billion to $11 billion in partner contributions and government incentives, could lead to positive adjusted free cash flow this year, any further delay in revenue and earnings recovery could result in another cycle of cash burn.

Unjustified Forward Multiples

Because Intel is expected to report almost no profit this yeareven on a non-GAAP basisits valuation looks very high. INTC's forward earnings multiple of almost 50x (significantly above the likes of NVIDIA, AMD, and TSMC) suggests that the market has factored in a lot of optimism on Tan's return, while the details on how he plans to turn the chipmaker around remain unclear. To me, this indicates that the market is overly optimistic on earnings recovery expectations. We need to look at a three-year forward multiple to see things more reasonably, where Intel is at 13.4x, roughly the same as AMD, while NVIDIA is at 16.2x, and other players like Broadcom at 18.3x, Qualcomm at 12.6x, and TSMC at 10x.

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I expect Intel's multiple will get further compressed as the company continues to struggle with its foundry business and delays in launching its AI GPU product until at least next year. My thesis is that the stock will likely get worse before it gets better, because the new CEO isn't a miracle worker. For example, comparing to AMD, AMD is now cheaper than Intel, and AMD does not have to deal with the financial struggle of reorganizing its business. Advanced Micro Devices is selling at a leading profit multiple of 13.8x, which reflects a slight discount to Intel's present earnings multiple of 13.4x. In my view, AMD is a rock-solid chip play that has become too cheap recentlyan alternative way to allocate capital instead of investing in Intel, especially without any clarity on its foundry business. At the moment, Intel is expected to show the least revenue growth among peers like NVIDIA, AMD, and TSMC, and that isn't forecast to change anytime soon. Therefore, I find it hard to rationalize diverting capital to Intel over the other names. Additionally, if earnings estimates continue to be cut, the valuation will be pushed up exponentiallyas seen for 2025, a move closer to a flat line for non-GAAP EPS could put the P/E on expected earnings into the hundreds.

DCF Analysis

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Looking at a DCF valuation, any upside momentum for Intel looks even bleaker. Based on Wall Street estimates, my DCF model suggests an intrinsic value of $21.74 per share, which represents a potential downside of about 5%. This model uses a rather optimistic discount rate of 10% and a terminal growth rate of 3%. Revenue projections in the DCF model forecast growth from $55 billion in Year 1 to $68 billion by Year 5, which is in line with Wall Street estimates. Additionally, net margins are expected to expand significantly, rising from 4% in Year 1 to 12% by the end of the forecast period. Even with these optimistic assumptions, the DCF model indicates an apparent downside for Intel.

Market Valuation and Reassessment

Honestly, I think Intel's recent run-up has already priced in most of the optimism around Tan's return. Yeah, the stock had been stuck below its average price target for most of the past year, but last week's rally changed that. As of March 28, Intel was sitting around its average valuation of $22.9. But let's not forgetjust a year ago, the average price target was in the mid-$40s, and three years ago, it was in the mid-$50s. That tells me analysts have been cutting their expectations for a while now. The broader semiconductor and tech sell-off has actually made valuations look more attractive across the boardMorningstar even says the tech sector is about 8% undervalued right now. So, with better opportunities popping up elsewhere, I think it makes sense to start reallocating away from Intel. The excitement around Tan is already baked into the price, and I don't see a strong enough reason to keep riding this wave.

Gurus Are Bailing

Big-name investors have been dumping Intel for a while now. Since mid-2022, guru sells have been outpacing buys, and some of the biggest names in the gameKen Fisher (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), and Chris Davis (Trades, Portfolio)have been cutting their stakes significantly. Fisher, for example, slashed his Intel holdings by about 77% as of late 2024 and shifted that capital into AMD, Nvidia, and Broadcomcompanies that, let's be honest, have a much clearer path in AI. That tells me that even the investors who once backed Intel as an AI play are jumping ship.

Chris Davis (Trades, Portfolio) did the same thing, cutting his Intel position by almost 80%. But instead of going all-in on AI, he moved into Applied Materials (which has a much stronger outlook, in my opinion) and more traditional plays like CVS and REITsthink Hudson Pacific Properties and Rexford Industrial Realty. The way I see it, these guys aren't just rotating out of Intelthey're moving toward companies with better long-term potential and fewer question marks hanging over them. And honestly? That makes a lot of sense to me.

Concluding Thoughts

In conclusion, I believe Intel is in a complete mess right now. The company is losing on multiple fronts and is clearly being crushed by its competitionsomething I really dislike when assessing an investment. While there is always the possibility of a 180 turnaround, I see absolutely no signs of that happening in the near term. Now that Intel has named a new CEO, I expect the company to finally get its act together, but investors need to see a concrete plan to turnaround this struggling business. Although Intel shares have held up somewhat amid overall market turbulence, true gains won't materialize until its financials improve meaningfully. Even though I appreciate Tan's background, I remain wary that a new CEO can immediately fix decades of strategic drift. Until Intel shows real, tangible improvements and carves out a competitive niche, I believe its risk/reward profile stays tilted to the downside.

This article first appeared on GuruFocus.