Intel stock (NASDAQ:INTC) is an American multinational semiconductor corporation. In its recent financial reports, Intel raised many concerns for investors with its declining revenue and slow sales growth. The company’s stock has been downgraded by 14.94% in just one month. There are risks associated with Intel’s future, which could slow down the company’s growth, including macroeconomic conditions and strict competition in the industry.
However, Intel’s catalysts included its potential AI expansion and financial support from the government. This could help Intel to recover from its recent poor performance. Despite the company’s recent slow growth, Intel is on the road to recovery, and the stock holds a potential upside of 31.6%. Intel warrants a buy.
Catalyst
The main catalyst for the company is the expansion of its product portfolio. At the company’s recent “Vision 2024” event, Intel introduced the Intel Gaudi 3 specifically designed for high-performance AI workloads. Gaudi 3 is created to improve performance and cost efficiency for training AI machine models. Compared to the Nvidia H100, the company is confident that Gaudi 3 can perform at an average of 50% better inference and 40% on average better power efficiency. This performance improvement can make Intel’s products more attractive to companies investing in deploying AI models at scale. Moreover, the design of Gaudi 3 allows customers to integrate it into the data centers with existing Intel systems. This compatibility can encourage current customers to adapt Gaudi 3 to their systems, which could help Intel improve its sales and profit in the future.
This new product indicates Intel’s strategic moves to strengthen its position in the fast-growing AI industry. Gaudi 3 could give Intel a competitive edge in the AI market, where efficiency and scale are valued. This new open, scalable AI system attracts more customers across different industries for the company. Some corporations collaborating with Intel are IBM (NYSE:IBM), implying Gaudi accelerators to their current data storage platform. Intel is innovating its products to adapt to the market’s demand and expanding into the AI industry. This indicates its ability to adjust to changes in the competitive technology industry. The successful operation of Gaudi 3 in the AI industry can lead to significant financial growth for Intel, driven by new sales opportunities and an expanding market.
Another boost for Intel is the supporting funds from the government. Recently, Intel received up to $8.5 billion in funding from the federal government under the CHIPS and Science Act. The company will use the funds to support its Arizona, New Mexico, Ohio, and Oregon projects. Intel gains benefits from government incentives to support and expand domestic chip makers. I believe this fund supports Intel’s further growth and enhances its focus on the advantage edge in semiconductor manufacturing.
Valuation
Overall, Intel’s financial performance has not been impressive in recent years. The company presents a significant decline in revenue and operating income for FY2022 and 2023. I believe this is due to the lower demand for company products, mainly notebooks and desktops, across market segments and production delays, which have impacted the company’s sales in recent years. I forecasted revenue to drop by 5% for FY2024. It is an improvement from FY2023’s revenue which decreased by 14%. This is because of the catalysts mentioned above in Q1 2024, which could support better revenue growth for this year. The average revenue growth for future terms is around 7%. The operating income was forecasted to be an average 3-5% margin.
Moreover, in its recent 10K report, Intel also mentioned that the company is heavily investing in new technology and facilities expansion to support future growth, in which their capital expenditures can remain high in future periods. I forecasted its capex would continue to be 45% of its revenue and around 30% in the long term.
The cost of equity is 11.73%, based on the beta of 1.18, and the cost of debt is 1.83%. The cash flow is discounted on the WACC of 9.39%, and the terminal growth rate is 3%. The suggested fair value for Intel would be $47.62, a potential 31.6% upside from the current price of $36.20.
Risk
Intel operates in a highly competitive market. It needs to compete against companies like Nvidia (NASDAQ:NVDA), AMD (NASDAQ:AMD), and emerging new companies like ARM (NASDAQ:ARM). These competitors have already established their dominance in the industry. They are advancing their products quickly to adapt to any market’s requirements. Intel’s ability to keep up with rapid technological advancements and customers’ expectations is crucial. Failure to make any needed adjustments in the future could cause a significant decrease in customers’ demand and negatively impact any of the company’s forecasts.
Moreover, as a multinational corporation, Intel stock operates across different countries. Therefore, the company faces higher geopolitical issues and supply chain disruption risk. The rising conflict between China and the US government about trade restrictions and the ongoing conflict between Ukraine and Russia can contribute to Intel’s supply chain disruption. This would cause production delays, negatively impacting Intel’s operations and sales growth in the future.
Conclusion
In conclusion, Intel’s current performance is decelerating; however, it is still investing in its long-term growth and expansion into the AI industry. These investments promise future growth for Intel stock. There are also risks involved, including a highly competitive market and geopolitical issues. Overall, Intel stock still warrants a buy. The stock has the potential upside of 31.6% to reach $47.62 from its current price of $36.20.
On the date of publication, Michael Que did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
The researchers contributing to this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.