Summary

• Intel has lost the AI chip race with zero GPU market share in 2024. The chip manufacturing capability could make INTC recover.

• The increasing global AI race and geopolitical conflict call for solid US footing for AI chip manufacture. INTC is the only one available in the US and positioned well.

• If INTC can grab these opportunities, regroup, and refocus, it could significantly outperform expectations.

• I start a buy rating, considering the bar is set very low for INTC to beat in the foreseeable future, and INTC may turn into solid GARP play.

Intel Headquarters

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One of my readers recently asked me about Intel's role in the AI megatrend. About a year ago, I closed all my Intel (NASDAQ:INTC) positions, believing that they were lost in the AI chip race. Given the rapid development in the AI industry and the fast-evolving ecosystems, recently there appeared some decent opportunities with the manufacturing of AI chips. Intel is the only chip manufacturer in the United States and the new US administration wants to have chip manufacturing strengthened in the US. If Intel could grab this opportunity to regroup and refocus its business, INTC stock could become a solid GARP candidate for long-term play. I will start with a buy rating for INTC at the moment based on the fact that the bar with earnings estimate is set very low for INTC to beat in the foreseeable future. The stock could get a further boost due to the potential tailwind in the AI chip manufacturing industry.

INTC Quick Overview

Intel has been the leading player in the semiconductor industry for a long time in the era of general computing (e.g. CPU) for personal computers and server computers. INTC is known as one of the top technology companies. Today INTC is still the number 1 CPU manufacturer in the world. 8086 - Intel’s first x86 chip, which is still a huge part of the chip architecture in computers today. The most recent quarter report (Q4 of 2024) shows "roughly seven out of every 10 PC" is powered by Intel. The market-leading shares are still found in the desktop, laptop, and corporate PC sectors, although AMD appears to be picking some market shares according to what was reported below in November 2024.

• Intel had 71.3% of the desktop CPU market, while AMD had 28.7%.

• Intel had 76.1% of the client-side CPU market, AMD had 23.9%

• Intel had 77.7% of the mobile CPU market, and AMD had 22.3%

However, Intel started to fall behind when accelerated computing (e.g. GPUs) took over and been growing fast due to the AI revolution that started about two years ago. GPUs have become the dominant chip for building huge-scale AI data centers. Intel's GPU market share was falling to 0% in 2024 from 1.33% in 2022, with the miss on the AI chip war. INTC's growth has been largely limited in the past two years.

INTC stock prices have been going sideways for many years. This is mainly due to misses on two generational growth opportunities: the smartphone boom and the AI GPU rush. Intel first rejected Apple's proposal to become an iPhone chip supplier in 2008, and then in 2011, Intel was rejected by Apple as a chip supplier.

Intel's last attempt to regain its chip giant status was the IDM 2.0 Foundrys. Foundrys are massive plants that manufacture chips. Under the departed CEO Gelsinger, this was the plan to save Intel. Keep in mind that the current chip leaders, such as NVIDIA or AMD, outsource their chip production to Taiwan Semiconductor Manufacturing Company(TSM). Intel still produces its chips. INTC is now the only major chip manufacturer in the United States.

AI's new opportunities for INTC may just come at the perfect moment

INTC has lost the AI chip race in the AI computing paradigm shift from generalized computing (CPUs) to accelerated computing (e.g. GPUs). Nvidia is the clear leader while AMD is a remote second place in the current AI chip race.

However, triggered by the worry of the geopolitical conflict, the current US administration is pushing what I call "fab in home". Fab stands for fabrication, a facility where integrated circuits (ICs) are manufactured. Due to the heavy capital investment up front and margin concerns, most leading chip makers such as Nvidia, and AMD, are turning into "fabless" with perhaps the only exception INTC which still has the full-scale fab facility in place, called Intel Foundry. Now the US "fab in home" movement appears to open the door to Intel because it is the only fab play in town for the US at the moment. INTC looks very promising in getting back in the AI infrastructure race through the manufacturing game.

The manufacturing part of the business could be very substantial to INTC, considering that TSM's projected revenue is projected to be over 113 billion in 2025, while INTC sales (estimated at 53.5 billion) are only half of it. If I hypothetically assume 10% of the TSM's manufacturing business would come back to Intel, 10% revenue would mean a 20% jump in sales for INTC plus the higher growth rate estimated at 28% for 2025. The following shows more details of the estimated revenues and earnings between the two companies.

SA INTC and TSM data

Growth and Profitability Comparison (Author using SA data)

INTC has made a strong commitment to advancing its manufacturing capabilities. One key piece of evidence is that INTC grabbed most of ASML's high-NA EUV Machines in 2023 and 2024. These machines are needed for the scaled operations of Intel 14a, Intel's latest manufacturing process for creating chips using 1.4-nanometer (nm) technology. Technology-wise, Intel is already considered to be ahead of TSM. According to the latest report, Intel's 18a (1.8nm) node will be in full production in the first half of 2025, while TSM N2 (2nm) will be shipped a bit later. So I believe that Intel's strategic bet on its in-house foundry business may hit the right time with the fab-in-US expected to start in 2025. This is where TSM's cheaper labor cost will no longer be a competitive edge.

Looking a bit further, I believe that it is quite possible that INTC could get into the AI race chip game through its fab manufacturing advantages. The macro conditions such as heavier tariffs and the possible geopolitical conflict escalation between China and Taiwan would affect severely TSM's operations. In other words, INTC may be able to increase its pricing power through its advanced fab capabilities in the US. The latest report on the deal proposals of "breaking up" Intel is strong proof that the recovery opportunities look promising for INTC due to its business values.

BAR is not too high for a solid GARP play

The estimates of INTC revenue growth are at mid-single digits for the next 2 years as shown in the table above. The growth would be fine if the bottom-line improvement could maintain a low double-digit PE ratio such as 14 for 2027 as shown.

We can also see that TSM has demonstrated clearly that the fab business can be A+ grade in Profitability. Given INTC's commitment and current size in manufacturing, it would be a reasonable expectation that INTC AI fab opportunities could improve its profitability and perhaps move into an A- or even A grade from the current B+. As an investor, I would not think it is too much the ask for such an improvement. More specifically, the current B+ rating is based on the 34.32% trailing gross profit margin shown in the SA database. However, the gross margin is expected to be 36.0% in Q1 2025 as the company has projected. The trend seems to turn positive.

Notice that with the current estimates shown in the same table above, INTC seems to hit a growth bottom in 2025. The lap comparison may work in INTC's favor as the company is moving over the lowest growth points (quarters). I believe that the downside for stock appears to be somewhat limited from here, assuming all bad news is out.

Cautious long strategy may be a matching play

INTC used to be a good dividend player, sometimes paying a high dividend of around 4%. INTC shares were good for long-term holding back then. Now INTC has cut all its dividends and is undergoing business rework, and the long investment will need some safety guardrails to be in place.

My investment plan involves stock options. More specifically I will buy long OTM (out-of-money) calls and sell cash-secured PUTs while maintaining a slight credit-positive situation for the combined positions. This is done so to create a virtual dividend stream for me. Let me use the following option chain (for June) to illustrate an example of my play. As highlighted in the table below when INTC stock was around $26, a $28 call could be purchased for around $2.36, and a $25 Put could be sold for $2.54. The net credit would be $0.18 which may not look too much but it would reduce my loss to when the stock would drop below $25 instead of $26 if the shares would be bought right away.

https://www.barchart.com/stocks/quotes/INTC/options?expiration=2025-06-20-m&moneyness=5

INTC Option Chain (Barchart.com)

Notice this is not a strict passive buy-and-hold play, the positions may need to be reviewed and renewed in case the stock price may stay in the price range between $25 to $28 in the next 4 months when the options expire. In this case, no INTC shares will be owned. I will keep the small profit from the net credit spread ($0.18 for one combined position). I will continue the same procedure for another 6 months or whatever time frame (like 3 months) that I feel comfortable managing.

On the other hand, if I get shares by the call assignment, I can keep INTC for the longer term since the stock price is higher than $28 already. Similarly, if I get the shares during the put assignment when the stock is below $25, I would check the losses and review the company to determine if I would just cut the loss by selling the shares or stay long if the original investment thesis is still intact. Keep in mind, that the effort of managing time and options is necessary for what I call a "safety guardrail", which is accomplished with reduced loss and the PUT-selling premium collected.

The best part of this play is I am still paid (like a dividend) when the stock goes nowhere and I have much of the upside potential kept because of the call option I own.

Risk and Caveats

There are no guarantees about how long the promising AI chip growth could continue. The risk of running into the slowdown of AI would affect the fab business and dash any new hopes INTC has for AI.

The biggest risk may be INTC's inability to capture new fab opportunities. For example, the new management team may not prioritize the fab enough because the fabless has been the trend for the US semi-industry for quite some time. In addition, there would still be competition over TSM in innovation and cost-effectiveness. There are still many uncertainties involved in taking the fab market share. Management's ability to execute remains uncertain, as Intel is still searching for a new CEO.

The recent breakup proposal from the competitors may also inject uncertainty into INTC stock, which could be bad news for investors seeking stable long-term investments.

Closing Thoughts

With restructuring and resetting on the way, INTC stock may look favorable in terms of growth and valuation compared to its peers and sector metrics. The key to INTC's future is how to maintain business growth to meet the lowered estimates. With the shift to US-based fab and AI chip growth potential, INTC may capture new opportunities and become a solid GARP growth play for long-term investors.