Intel: Transforming Business Model and Reaping Success

Intel, the pioneer in microprocessors, is currently undergoing a significant business model transformation. It is striving to establish itself as the premier U.S.-based contract chip manufacturer with substantial support from the government. While the global personal computer industry has been facing consecutive quarters of declining unit sales, Intel has been battling fierce competition from Advanced Micro Devices in both PC and server markets.

Furthermore, Intel has been playing catch-up with Nvidia and AMD in the graphics processor market for AI workloads, resulting in a 21% decrease in revenue during the first three quarters of the year. This decline led to an operating loss of $2.5 billion. Despite these challenges, Intel's stock price experienced a remarkable 91% rally, marking its largest annual increase in two decades. Although this growth was outpaced by Nvidia (240%) and AMD (132%), many believe that Intel's rally is far from over.

Gus Richard, an esteemed chip analyst at Northland Securities, argues that Intel's stock is still undervalued. He recently set a price target of $68, exceeding the current level by more than 30%, making him the biggest Intel bull on Wall Street. Richard's confidence in Intel arises from two key factors. Firstly, he believes that Intel's outlook is improving on multiple fronts. Secondly, he encourages investors to view the chip maker from a sum-of-the-parts perspective, highlighting that Intel is in the process of breaking itself up.

To delve into the fundamentals, Intel has faced difficulties in recent years regarding its once-dominant manufacturing prowess. However, Richard predicts that by 2025, if not earlier, Intel will reclaim its leadership position in process technology from Taiwan Semiconductor and other competitors. Additionally, he expects Intel's renewed focus on efficiency to drive non-GAAP gross margin to approximately 53% in 2025, significantly surpassing the 43% in 2023. Richard noted, "Over the last 20 years, the company with access to the best process technology has gained market share." Intel's recent announcement of securing three customers for its cutting-edge 18-angstrom chip factory line being constructed in Arizona serves as strong evidence that the company is regaining its manufacturing lead.

The future seems promising for Intel as it forges ahead with its business model transformation and capitalizes on its strengths. With an improving outlook and the potential for increased market share, Intel's stock appears primed for further growth. As the upcoming years unfold, Intel aims to reclaim its position as a dominant force in the technology industry.

Intel's Revenue Growth Predictions

According to Richard, a renowned analyst, Intel is expected to experience a recovery in revenue growth over the next few years. He anticipates an 8% increase in revenue for next year, followed by a more significant surge of 16% in 2025.

Profits are also projected to rise steadily, with non-GAAP profits estimated to reach 94 cents per share in 2023, $2 per share next year, and $3.30 per share in 2025.

Soft PC Demand in the First Half of 2024

Richard cautions that the demand for PCs is expected to remain soft during the first half of 2024. However, he foresees a recovery after this period. This recovery is predicted to gain momentum in 2025 as the wave of PCs purchased during the pandemic begins to age out. Richard believes that the emergence of artificial intelligence (AI) in PC technology, especially in content creation and productivity applications, will drive up PC sales in 2025.

Intel's Strategic Transformation

In addition to revenue growth predictions, Richard notes Intel’s ongoing transformation. He observes that the company is in the process of splitting itself into five separate entities. This initiative began in 2022 with the initial public offering (IPO) of Mobileye, a company specializing in autonomous driving technology. Currently, Intel maintains an 88% stake in Mobileye, valued at approximately $30 billion.

Furthermore, Intel has expressed intentions to proceed with an IPO for Altera, a field programmable gate array company that it acquired in 2015. The company has also recently sold a combined 30% stake in IMS Nanofabrication to Taiwan Semi and Bain Capital. IMS Nanofabrication is known for manufacturing masking tools used in extreme ultraviolet lithography.

Richard predicts that Intel will eventually divide its products and foundry businesses into separate entities as well. Should this happen, Intel's foundry arm is anticipated to become the second-largest player in the industry, second only to TSMC. Richard estimates its value to be around $100 billion.

The Unfolding Story

While sum-of-the-parts analyses often fail to reflect future events, Intel's case is unique as its story is already unfolding. In June, Intel announced that it would treat its products and foundry segments as separate businesses. Although there are currently no immediate plans to split the two businesses apart, Richard believes that it is inevitable. He suggests that shareholders will benefit from this separation when it ultimately materializes.