After a series of missteps over the years, Intel, once the market leader and a sign of innovation, lost its position. It is now facing substantial financial pressure as losses pile up. However, its last move, given the market's circumstances, could change direction and save it, putting it in a formidable position.

Core Fundamentals: Mixed signals

Intel's revenue is a cause of concern as in 2022, 2023, and 2024, it had declines in sales of 20.2%, 14%, and 2.1%, respectively. Although the rate of decline is decreasing as well, this could get back to double-digit levels if the company does not stop losing market share.

In the profitability side, the company went from a mid-30% net income range in 2019 to a 7.2% loss in 2024. This reveals difficulties in pricing its products competitively and a massive capital expenditure related to manufacturing expansion.

Free cash flow turned negative in 2022, and since then, the loss margin has been in the high 20s

Product Portfolio

Intel's product line shows signs of revitalization, with processors rivaling AMD's gaming. This shows a much-needed technical upgrade from past versions, where they consistently fell behind AMD.

On the server side, performance benchmarks show that the new Granite Rapids platform outperforms the competition. As presented by Phorinix in the following tests:

GROMACS

GROMACS is a molecular dynamics package mainly designed to simulate proteins, lipids, and nucleic acids.

Granite Rapids GROMACS performance (Source Phoronix)

OpenFOAM

OpenFOAM is a C++ toolbox for developing customized numerical solvers and pre-/post-processing utilities for solving continuum mechanics problems, most prominently including computational fluid dynamics.

Granite Rapids OpenFOAM performance (Source Phoronix)

NAS Parallel LU

The NAS Parallel LU is a Lower-Uppersymmetric Gauss-Seidel kernel that requires a good memory and compute bandwidth balance.

The discrete GPU efforts are yielding products with reasonable performance, getting close to AMD, and a price advantage, with the best price per FPS. However, competition against NVIDIA is yet to be seen, as the ecosystem for NVIDIA GPUs is now the most robust.

The opportunity: Critical interest and new business

• Warning! GuruFocus has detected 7 Warning Signs with INTC.

With the new tariffs implemented and the ever-increasing tensions, domestic production of high-performance chips is growing in importance. Taiwan, where TSMC is located, has been constantly under the risk of annexation by China and will be one of the first places to be invaded in a case of escalation. This is a significant security threat for the US, which depends on its production. Companies like Apple, NVIDIA, AMD, Broadcom, and Qualcomm all depend on TSMC's manufacturing power.

To address this problem, the US government has created the CHIPS Act, with $39 billion directed to semiconductor manufacturing projects, which signals interest in the matter. Due to the industry's capital-intensive nature -Intel's capex is already over $25 billioneven more funds could be approved.

Intel is leading the charge on domestic production. While AMD, Apple, and NVIDIA will use TSMC's plants in the US, Intel is building its own. This reduces costs, keeps earnings local, and avoids the risk of TSMC being overloaded with orders or plagiarizing technology in the case of falling into China's control, making Intel an ideal candidate for government aid.

The cornerstone of Intel's turnaround is its IDM 2.0 strategy, which aims to restore manufacturing leadership while simultaneously building a foundry services business. This dual approach requires unprecedented capital expenditure, with the company moving from $16 billion in 2019 to over $25 billion in 2022 and 2023.

If Intel's plans work out. It'll be the only PC/server company to develop and produce its chips in the US at scale, beating (at least for a moment) AMD in the long-standing battle between the two.

Investors seem to be overlooking this possibility, as Intel is trading below AMD's and peer numbers.

The correct price?

Intel trades at relatively undemanding multiples compared to its semiconductor peers, with a P/S ratio of 1.54 versus the industry average of 2.38 and a 4.39 for AMD. This discount reflects the current sentiment about the company since its missteps.

The valuation incorporates significant skepticism regarding Intel's ability to restore technology leadership and manufacturing competitiveness. Under these circumstances, if the company executes its roadmap successfully and takes back its place and market share, there is substantial upside potential from current levels.

GuruFocus's valuation of the company seems to consider this and serves as a point of reference for the company's fair price.

Risks

Financial Position: Pressure Mounting

Intel's balance sheet has deteriorated as the company funds its manufacturing transformation. Long-term debt increased substantially, from $33 billion in 2020 to over $46 billion by 2024. The company's decision to cut its dividend by 66% in early 2023 signaled the financial pressure created by its capital-intensive strategy.

TSMC business strategy does not lag behind

The CEO of TSMC has seen the risk of being replaced and now wants to invest $100 billion in US soil to manufacture its technology there. However, the deal needs to be approved by the Taiwanese government, and fears of losing the protective effect of the semiconductor business might disincentivize the approval.

This movement can be seen as TSMC trying to flee Taiwan, leaving behind the risks of annexation by China and an unprotected country. Hence, the approval is unlikely when national interests weigh more.

Competitive Environment: Losing Ground on Multiple Fronts

Intel faces intensifying competition across its business units:

1. Data centers: AMD has leveraged TSMC's manufacturing advantages to deliver superior performance per watt, increasing its server market share from single digits to 33% by Q1Y2024. Furthermore, since its unit market share is 23.6%, that means AMD chips command a higher price per unit.
2. Nvidia with its GPUs being more efficient for AI applications, has completely dominated the AI accelerator market, with Intel's efforts in this high-growth segment yielding minimal traction.
3. Client computing: Apple moved away from Intel to create its own processors, yielding high performance and never-before-seen battery life. At the same time, AMD's chips are becoming the go-to for Windows machines.

Conclusion

Intel represents a high-risk, potentially high-reward investment proposition. With current levels of instability at an all-time high across most industries, the stock price presents a strong appeal. The current trade war can be a tailwind for the company and one of the few to come out of this with a positive experience.

However, this position should be sized conservatively within a diversified portfolio, acknowledging the substantial execution risks. Intel's plans will require years to materialize, testing investor patience. Yet for those who can maintain a truly long-term perspective, the company's combination of engineering talent, manufacturing scale, and governmental support provides a foundation for potential value creation that the market may be underappreciating.

This article first appeared on GuruFocus.