The brutal sale in Intel (NASDAQ: INTC) stock may finally be gone. Stock appears to have risen again on news that the company plans to spin off its foundry business into a subsidiary. It also expanded its deal with Amazonwhich signed a new agreement to produce artificial intelligence (AI) chips for Amazon Web Services (AWS), potentially transforming it into a major player in the AI server chip market.
Still, given the stock’s performance over the past few months, one has to wonder whether this recent rally is a sign of a sustainable recovery for Intel, or whether investors should continue to avoid the stock.
Intel’s New Life
Intel has undoubtedly been in decline, and its attempt to reemerge under CEO Pat Gelsinger has not gone according to plan. The company made ambitious plans to invest tens of billions in new foundries to create an outside chip manufacturing business that could compete with Taiwanese semiconductor production (TSMC) and Samsung.
It also made technical improvements and boldly claimed it would regain process leadership by 2025. However, planned capital spending of $25 billion to $27 billion over the next year will take a significant toll on its balance sheet. Multiple sources also told Reuters that chips Intel produced for Broadcom failed that company’s tests, raising questions about how well Intel can compete in that market.
The fact that Intel has suspended its dividend and laid off more than 15% of its workforce shows that it has more than met its targets. That news in August sent the stock to multi-year lows.
Still, the foundry business has shown potential for improvement. Intel will spin that business off into a separate subsidiary, giving it its own operating board and the ability to raise capital separately. Additionally, the aforementioned deal with AWS could help make Intel’s foundry business a top company in its sector.
New Intel Stock Investment Hypothesis
Intel’s shares had fallen about 60% so far this year before this latest rally. In that context, the investment case for Intel has become compelling for one key reason: valuation. The 93 price-to-earnings ratio, however, doesn’t reflect that.
In contrast, its price-to-sales (P/S) ratio is just below 2, well below the 11 P/S ratio of its competitors. AMD. The undervaluation is particularly evident in the price-to-book ratio of less than 0.8. This means that the market has valued Intel more than 20% below the value of its assets minus its liabilities. That level is likely far too low for a company that remains a major chip developer and manufacturer.
At the same time, investors have a lot of choices when it comes to semiconductor stocks. As Intel has lost value, stocks like AMD, QualcommAnd Nvidia have delivered market-beating returns as they find customer bases in the AI chip market. Investors should ask themselves whether the bargains in Intel stock are worth it, given the clearer opportunities offered by Intel’s competitors.
Investing in Intel Stock
Investors who choose to buy Intel stock should likely limit their exposure to small, speculative positions.
The company’s valuation makes the stock look like an attractive buy, assuming it can attract more outside funding and successfully produce Amazon’s AI chips. However, the chip industry is in a period of significant secular growth thanks to the AI trend, and many of Intel’s competitors have seen significant price gains while their shares have fallen. The Broadcom deal setbacks also raise questions about whether it can execute on its plans to supply new high-end chips, underscoring the risks involved in betting on Intel’s recovery.
Ultimately, Intel stock may be on the cusp of a long-awaited rebound, but until the company can address more uncertainties surrounding its business, investors should be cautious about buying shares, if they buy them at all.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Healy has positions in Advanced Micro Devices, Intel and Qualcomm. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Nvidia, Qualcomm and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
Intel is spinning off its foundry business into a subsidiary. Time to buy? was originally published by The Motley Fool
