Intel Corporation (NASDAQ:INTC), one of the leading semiconductor manufacturers in the world, is making progress toward recovery, with the company now focusing on designing chips for the booming AI sector. Intel’s chip supremacy was threatened by the likes of Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) in recent years, with Intel failing to keep up pace with technological advancements. Despite signs of recovery, I am neutral on Intel stock due to profitability concerns.
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Intel’s AI Efforts Deserve Credit
Nvidia’s H100 chips have so far dominated the market for AI chips, with the company’s products now being used by many tech giants to power AI-based applications. At an event named AI Everywhere, Intel unveiled several new products on December 14 to rival Nvidia’s dominance in this sector.
After unveiling the Intel Gaudi 3 accelerator at the event, Intel claimed that this processor, which is scheduled to hit the market next year, will outperform Nvidia’s H100 data center GPU. This would mark a notable comeback from Intel to catch up with market-leading AI processors.
Intel unveiled an all-new Intel Core Ultra mobile processor as well, which is the first processor family built on Intel 4 technology. These processors will be primarily used in Windows personal computers and laptops.
This also marks a big win for the company and investors, as Intel has been under pressure in recent years for its inability to compete with next-generation laptop processors introduced by competitors such as AMD. Core Ultra has advanced AI capabilities, including Neural Processing Units, which enable the local execution of large language models.
At the AI Everywhere event, Intel also launched fifth-generation Xeon processors built with AI computing at the heart. Intel’s AI efforts have so far gone unnoticed by many investors as Nvidia has taken center stage. However, the company seems to be moving in the right direction, aided by strategic decisions to focus on AI-driven growth.
Intel is aggressively incorporating AI into most of its existing products, including Xeon and Atom-based systems. In addition, the company launched OpenVINO, a cross-platform software substrate to help developers navigate complex tasks. Intel’s efforts extend to networking as well, with the company actively participating in the Ultra Ethernet Consortium to develop an Ethernet-based alternative for AI networking.
Intel’s advanced packaging segment is another area of the company’s business that is seeing strong demand with the rise of AI. The advanced packaging technology developed by Intel over the last few decades has become the industry standard for chip packages inside PCs, smartphones, and data centers, and the company was awarded two customer AI designs in the third quarter alone. There is a surging interest in Intel’s advanced packaging from leading chip companies.
New Strategies to Drive Growth
Intel’s turnaround strategy is centered around a few growth pillars, and the company has made several changes to its business model to drive growth.
First, Intel is now committed to regaining process leadership with IDM 2.0 transformation. In addition to developing Intel 7, Intel 4, Intel 3, Intel 20A, and Intel 18A processors – a transition that is expected to be complete by 2024 – the company is focused on fundamentally changing its process architecture with innovations such as RibbonEFT and PowerVIA. These changes should help the company compete better with other chip manufacturers.
Second, Intel is aggressively expanding its foundry business after embracing this strategy a couple of years ago. Intel Foundry Services has already announced strategic partnerships with a few chip customers, and the company is investing in manufacturing plants in Arizona, New Mexico, Ohio, and Oregon.
Third, the company is investing in AI accelerators to offer improved chip performance and cost-efficient solutions to its customers. Investments in the AI sector should yield promising results in the next few years, with demand for AI-powered applications continuing to rise.
The Improving Market Outlook
The semiconductor industry is highly cyclical. Since mid-2022, the industry has faced a chip glut, with semiconductors proving to be in excess supply compared to the preceding two years when chips were scarce. As a result of this supply glut, inventory levels have risen, negatively impacting the profit margins of many chip companies. Not surprisingly, industry revenue has slumped, with demand continuing to soften.
According to Statista, semiconductor industry revenue is projected to fall to $515 billion this year from $574 billion reported last year. However, in 2024, revenue is projected to increase sharply to $576 billion, aided by favorable macroeconomic conditions stemming from a recovery of global economic growth.
Is Intel Stock a Buy, According to Analysts?
Bank of America (NYSE:BAC) analysts, led by Vivek Arya, made several changes to their semiconductor stock rankings on December 15 after taking into account the surge in chip stock prices in recent weeks. Intel was accordingly upgraded by the company amid the expectations for a strong performance from several semiconductor categories next year, including memory products.
On December 12, Raymond James boosted its price target for Intel from $42 to $48, citing the improving cash-flow profile of the company and conviction in the company’s product roadmap execution.
Based on the ratings of 28 Wall Street analysts, INTC stock comes in as a Hold. Further, the average Intel stock price target is $40.42, which implies downside risk of 13.6% from the current market price.
Intel stock has risen by 81% this year, with the company’s turnaround strategy winning the approval of investors. This stellar performance seems to have pushed the company’s valuation ahead of its economic value for the time being, which is why it may be better to wait for a better opportunity to invest in the company.
The Takeaway: Intel’s Progress Has Been Duly Rewarded
Intel, under CEO Pat Gelsinger, is moving in the right direction to regain some lost ground. This progress has been duly rewarded in the market this year, leaving investors with a small margin of safety to invest in the company today. If Intel gains more ground in the next few quarters, especially in the AI domain, a valuation re-rating can be justified. But for now, its earnings-growth trajectory remains to be seen.
