Summary

• Intel closed 16% higher on Tuesday on rumors of TSMC and Broadcom buying parts of the business; this is the trade opportunity we were eyeing for 1H25.

• We think the upside from this chatter is limited after Tuesday's run-up, and more importantly, we think Intel has troubling competition woes heading into the 2H25.

• Intel is cheap, but this is not a window to buy on weakness considering the higher risk profile for 2H25 from increased competition with Qualcomm, Nvidia and of course AMD.

• We’re taking this run-up to downgrade Intel to a strong sell, recommending investors take advantage of the excitement and count their profits.

Intel stock closed 16% higher on Tuesday on reports that the legacy semiconductor company may undergo a spin-off involving Taiwan Semiconductor Manufacturing Company (TSM) and Broadcom (AVGO), cutting up parts of the business. The Wall Street Journal broke the chatter on Saturday; TSMC is eyeing Intel's foundry business, i.e., its chip-manufacturing one, while Broadcom is interested in Intel's chip-design business. The catch is that, for starters, no agreement has been reached, so essentially, the market is preemptively (and dangerously) pricing in positives. Then, for the contrarian take, the rumored deal is unlikely to go through due to anti-trust and competitive issues to do with TSMC taking over what was meant to be the U.S.'s sweetheart for bringing chip-making back to U.S. soil and the latter being a Taiwanese company who the current U.S. administration has been hinting at placing export restrictions on and who already has a monopoly over the global foundry market, at 64% in 4Q24. Not to mention the even lower value of Intel's business if it's broken apart from its foundry side and all the potential that has been hung to it as a leading manufacturer of advanced nodes. If you take a look at Broadcom and TSMC's stock movement on Tuesday, it wasn't positive, with each down ~2% and ~1%, respectively, meaning investors of the two aren't seeing this as a positive.

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We last refreshed our thoughts on Intel after ex-CEO Pat Gelsinger stepped into retirement; it was the right guy, the wrong time kind of situation. We maintained our buy call on the stock, expecting upside potential from a takeover or breakdown of Intel's business now that Pat was out of the picture, considering he was the primary pushback against selling the business for parts. We stated:

Intel's undervaluation, new management, and potential business break up presents a compelling trade opportunity for the first half of 2025, in our opinion.

Now, we believe that moment has come to fruition, and this hype is as good as it'll get from our current visibility for the stock price performance hitting double-digit percentage on a potential takeover; the stock is up ~22% since our buy call versus the S&P500 up 1%. This is the trade opportunity we were eyeing.

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We're taking this run-up to downgrade Intel to a strong sell, recommending investors take advantage of the excitement and count their profits. We think the upside from this chatter is limited after Tuesday's run-up, and more importantly, we think Intel has troubling woes heading into the 2H25.

Increased competition = turned-up heat

The positive Intel has going for it is, in our opinion, its position within the PC market. So, Intel's bread and butter (where dollars and dimes are concerned) is Client Computing Group or CCG; this business segment made up approximately 56% of total sales in 4Q24, followed by its Data Center & AI Group, Network and Edge Group and then its Intel Foundry Services, in that order. Now, for Q4, management reported Client Computing Group sales up 9% Q/Q, but for next quarter, 1Q25, management is guiding all its major businesses to see a sequential decline in sales, CCG included. We think this quarter's Q/Q growth wasn't due to any real demand recovery, but rather orders placed in anticipation of U.S. import tariffs. Now, this isn't to say that PC growth will be flat this year, and so Intel won't see any positives in its CCG sales. Instead, we think PC will actually grow this year due to the Microsoft Windows 10 End of Life, which is set for October, and the refresh cycle that comes with, especially considering a more friendly interest rate environment. We just don't think Intel stands a lot to gain from it, and the reason is competition.

Side note: PC TAM (total addressable market) should expand this year, considering that there is an upcoming refresh cycle and that it will need to reflect Y/Y growth from 2024, during which the global PC market grew 3.8%, according to research from Canalys.

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Intel is not a new player in the game that we fear will get pushed out by older, more developed ones. Instead, it's one of the OG guys. This makes more sense considering that even with pressure from Advanced Micro Devices (AMD), which has been gaining share against the latter since at least 2022, it continues to hold the bulk of the Client market at around mid-70%, as shown below. The issue is that it is getting squeezed by other players who are putting their money where their mouth is, i.e., spending the capex necessary to compete, something Intel is less likely to do now with Pat gone and considering already heavy financial woes weighing on the company. Just this quarter, management reported that they will be slashing their capex to $20B from the range of $20B-$23B and guided for their non-GAAP gross margin to contract from 42.1% to 36% due to lower sales. This will make it harder for the company to compete against the likes of Qualcomm (QCOM), Mediatek, AMD, of course, and even Nvidia (NVDA). The competitive landscape is outpacing today's Intel, and this puts the company at higher risk for 2025 and marks the current run-up as all the more attractive as an exit window.

Mercury Research/Tom's Hardware

Let's take a minute to get into the nitty-gritty of this competitive landscape and how we expect it could weigh on Intel come 2H25.

AMD is a known competitor of Intel, so let us start there. AMD also makes a chunk of its total sales from its Client business line, which accounted for roughly 30% of total sales in 4Q24. AMD continues to steal shares from Intel, but that's likely to moderate, not disappear, in 2H25, even in the face of Intel's more competitive offering, which is its new 3nm Client CPU.

Now, next is Qualcomm, who more recently penetrated the PC market with Snapdragon X, part of the Snapdragon X series of PC processors built on a 4nm; there's a long way to go for Qualcomm here, but management is putting in the work (and money) to pressure Intel and AMD in their own market. The estimate places Qualcomm's share of the PC market at around 0.8% in 3Q24, but we think this could expand with improvements to software compatibility issues that came up mid-last year. Qualcomm is already setting up Snapdragon X to power Copilot+ PCs or AI PCs and setting for launch early 1H25. Qualcomm's recent earnings report sheds more light on this, with the company stating that 10% of Windows PC sales within the U.S. are powered by its Snapdragon X chips, which would mean it really did work fast to eat up market share between 3Q and 1Q25. Now, while we don't think this is entirely accurate to take at face value since the company specified that Windows PC sales that were above $800 had the chip and the average selling price for Windows PCs was $740 in 2024, it does signal the fast-paced nature of the PC market's competitive landscape. Qualcomm CEO is definitely counting on the company's share expanding, eyeing 50% share of the Windows PC market by 2029 (which is only around four years away).

Next, Wall Street's AI sweetheart, Nvidia, is pressuring Intel's x86 on the AI server with its ARM-based CPU, but also potentially on the PC front. The company has reportedly been developing its ARM-based consumer PC platform for a while and is set to launch in the 2H25, according to DigiTimes. The platform would rely entirely on Nvidia's CPU and GPU designs and highlights a big red flag for Intel: Nvidia is after the PC market, too. The consumer PC platform roadmap also collaborates with Mediatek and will launch in September of this year, with a commercial launch in March 2026 (again, not too far away, around a year out). Nvidia, unlike the other competition Intel faces from AMD and Qualcomm, is well positioned to take a stab at this market and come out with a substantial share of it; by well positioned, we're referring to its supply chain establishment, its own Tegra and Grace CPUs. We think Nvidia's role here is something we'll get more light on in the Nvidia GTC 2025 event scheduled for mid-March.

All in all, we think this goes to say the outlook on the market is positive for PCs in the 2H25, but that is no longer synonymous with positive for Intel. This becomes especially true considering that AI-capable PC shipments are expected to make a larger chunk of total PC shipments in 2025, currently estimated to be at 35%, as shown below, and that these players, namely Nvidia, have a solid foundation to take that share.

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What to do with the stock?

Intel is incredibly cheap, and there is no arguing otherwise. The stock trades at a forward EV/Sales of 2.9x versus the semi peer group average of 7.3x and competitors like Qualcomm at 4.8x, AMD at 7.1x or Nvidia at 27.4x. The following chart outlines the semi peer group valuation, highlighting Intel.

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Still, we don't believe this is a stock to buy on weakness, particularly with the possible competitive headwinds that could kick in during the second half of the year. The sell-side ratings for the stock are also extremely cautious, signaling that this could be an unsustainable bounce, with 37 out of the 45 analysts covering the stock opting for a hold, three for a buy, and five for a sell, as shown below. This is not to mention that, after Tuesday, Intel trades 14-23% above its median and mean price targets, respectively. So, we think the upside on top of this is capped at best.

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We continue to believe Intel can regain some of its intrinsic value down the line, but we don't see this happening in the near-to-mid term, nor do we think the current talks on the table will be the salvation. The PC front also presents extensive struggles with increasing competitive pressure. So, we recommend investors exit the stock and revisit when there is a clearer roadmap to the stock regaining that intrinsic value.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.