INTC - Intel: The Comeback We've All Been Waiting For

2023-08-17 12:00:49 ET

Summary

• Intel reported decent earnings results for Q2 and a good enough guidance for Q3 last month.
• The stabilization of the PC market and the growth of the generative AI industry could indicate that the worst for Intel is finally behind it.
• Despite all the risks, there are lots of growth catalysts that could help INTC’s business thrive even in the current challenging market environment.

After reporting decent earnings results for Q2 and expecting decent growth in Q3, Intel ( INTC ) appears to have momentum on its side, which could help its shares to appreciate further from the current levels. At the same time, the potential end of the downturn in the PC market along with the expansion of TAM thanks to the growth of the generative AI industry and the higher demand for chips in the future could indicate that the worst for Intel is finally behind it. Even though several risks could undermine Intel’s recovery story, I still believe that its stock is a buy at the current price as there are lots of growth catalysts that could help the company’s business thrive even in the current challenging market environment.

Is The Worst Finally Behind For Intel?

In late July, Intel reported its Q2 earnings results which showed that its revenues declined by 15.7% Y/Y to $12.9 billion but were still above expectations by $760 million. At the same time, the company’s profitability has greatly improved and its non-GAAP EPS of $0.13 was above the forecasts by $0.16. The main reason behind such an earnings beat was the better-than-expected performance of the company’s client computing group, which generated $6.78 billion in revenues during the quarter, while its nascent foundry division also exceeded expectations as its revenues increased by 307% to $232 million. This has helped to mitigate the weaker performance of Intel’s data center and network & edge businesses, which generated $4 billion and $1.4 billion in revenues in Q2, down 15% Y/Y and 38% Y/Y, respectively.

Despite this mixed performance with an earnings beat, the good news is that it appears that the PC shipment market is beginning to stabilize as the excess inventory is being sold off, which should help Intel keep the momentum on its side going forward. The company’s management itself noted in the latest earnings call that they’ve been helping their customers manage CPU inventory down, while the latest data from Gartner indicates that the PC demand is likely to return to growth next year.

This is good news for Intel considering that as its business is about to enter a gradual recovery phase, the improvement of the PC market along with the releases of Meteor Lake and Emerald Rapids CPUs later this year should help the company meet its targets and once again exceed expectations.

On top of this, the sudden explosive growth of the generative AI industry in recent months is another major growth opportunity for Intel, which could aggressively expand its TAM and accelerate its recovery. The latest reports indicate that the generative AI industry will be growing at an aggressive double-digit rate in the following years and is expected to be worth over $1 trillion in the next decade. In May, Intel already announced that it’s working on a new supercomputing chip that’s designed specifically for AI use and will be available in 2025. The management has also noted in the latest earnings call that there’s an increased demand for its accelerator products from the Gaudi Flex and Max product lines due to the surge in popularity of AI products and services. Therefore, it seems that the company has everything going for it to make the recovery successful.

What’s more is that as Western governments are racing to secure the supply chains for chips, Intel is more than likely to start receiving additional governmental funding to expand its business this year. The company has already submitted its first application to the U.S. Department of Commerce to receive funding under the U.S. CHIPS Act so that it can accelerate the construction of its fab in Arizona. At the same time, it seems that Intel is engaged in a lobbying campaign to get access to most of the funding under the CHIPS Act as its CEO Pat Gelsinger recently said that he believes his company should get more money than others under the program. In addition to that, Germany has also agreed to subsidize the company’s expansion on the European continent, while the recent approval of the EU-wide Chips Act could help Intel accelerate the expansion of its business.

With all of that in mind, it makes sense to believe that Intel is well-positioned to gain market share in the following years at least in the CPU industry, and exceed the expectations at the same time. The company already announced a good enough guidance for Q3 last month which made the street more optimistic about the business’s future and led to over 30 upward revisions in recent months. Since its shares now represent over 8% upside at the current levels, it also makes sense to believe that Intel’s stock has more room for growth. This is due to the fact that the stabilization of the PC market along with the expansion of TAM thanks to the growth of the generative AI industry and the higher demand for chips in the future could indicate that the worst for Intel is finally behind it.

The Greater Forces At Play

Despite all of those positive developments that Intel has going for it, there are nevertheless greater forces in play that are outside of the company’s control, and which could undermine the company’s recovery efforts.

First of all, the latest data from China indicates that the country is on the brink of deflation as the recovery of its economy after months of lockdowns has stagnated. What’s more is that after President Biden called the country a ‘ticking time bomb’ and pointed out its economic problems, and news came in that Beijing asked major investment funds to avoid selling their equity positions to prevent a further market rout. Considering that China is also in the middle of the shadow banking crisis now, its domestic troubles could have global implications, negatively affect the overall global economy, and make Intel potentially miss out on its growth targets.

On top of that, the potential further worsening of Sino-American relations is unlikely to help Intel thrive as well. Last week, the Biden administration issued new restrictions that prevent U.S. businesses from investing in the various parts of the Chinese tech industry, while the Chinese regulators didn’t approve Intel’s acquisition of Tower Semiconductor ( TSEM ) before the deadline. All of this is a big deal for Intel, since China is the company’s single biggest market and its potential loss in the future could make it harder for the management to execute a proper transformation on time.

The Bottom Line

Even though there’s no guarantee that Intel would be able to properly recover after years of reporting disappointing results and the execution risk is still very much in play, there are nevertheless reasons to be optimistic about the company’s future. At this stage, Intel has more than enough growth opportunities, which should help it improve its overall performance and even thrive in the following quarters. At the same time, it also seems that the downside to its shares appears to be limited right now since the company already trades around its fair value and it also has momentum going for it, which should prevent a sudden depreciation in price in the foreseeable future. Add to all of this the potential expansion of TAM thanks to the rise of generative AI and it becomes obvious that Intel has more room for growth going forward.

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