Intel (NASDAQ: INTC) is a stock that investors can easily dismiss. The longtime leader in the semiconductor industry has been overshadowed by Nvidia And AMD — and because of the sky-high costs associated with entering the chip foundry sector, many investors have turned their backs on the chip maker.
The good news for Intel is that artificial intelligence (AI) has led to a huge spike in semiconductor demand. This and the enormous government subsidies emphasize why Intel shares should eventually start growing again. Moreover, a largely overlooked factor should help ensure that success.
The salvation of Intel
Intel can be successful in the foundry industry because the government needs it to be successful. This is why.
Currently, Taiwanese semiconductor manufacturing (TSMC) is the largest chip manufacturer; according to TrendForce, about two-thirds of the world’s semiconductor production takes place in Taiwan. This is of serious concern to the US government due to Taiwan’s proximity to China and long-standing threats to invade the island.
That’s why the U.S. and other countries have offered tens of billions of dollars in subsidies to chipmakers like Intel to produce chips at home. Granted, Intel lags behind TSMC and Samsung technologically, and both companies are building foundries in the US
Nevertheless, Intel has more foundries in the US than any other company. Furthermore, Intel is the only company besides TSMC and Samsung that buys advanced equipment from ASML needed to build the world’s most advanced chips. The purchase of ASML’s most advanced equipment is part of CEO Pat Gelsinger’s effort to make Intel the technology leader in the chip industry again.
Intel’s challenges
The company’s plan to become a technology leader next year is unlikely to materialize. However, it has made improvements in an attempt to regain the lead it lost to longtime rival AMD.
The company also announced the Gaudi 3 Accelerator, an AI chip it hopes will compete with Nvidia. While Intel is touting its advantages over Nvidia’s Hopper H100 chip, Nvidia has already moved on to the Blackwell B200, likely allowing Nvidia to maintain its technical lead.
Furthermore, Intel will likely continue to struggle financially for the foreseeable future. While revenue of nearly $13 billion rose 11% in the first quarter of 2024 compared to the same quarter last year, free cash flow was negative at $6.2 billion. That’s because Intel spent nearly $6 billion on property and equipment in the first quarter. Since the company only claims $21 billion in liquidity, it may have to issue more shares or additional debt if its financial situation doesn’t improve.
Still, amid a nearly 40% decline in its share price since the beginning of the year, Intel stock has become a buy in one crucial metric: its price-to-book ratio. At just over 1.2 times book value, Intel stock is priced slightly above its equity value.
For comparison, AMD sells for 4.6 times its book value, and Nvidia trades at a staggering price-to-book ratio of 62. So Intel’s rock-bottom valuation could entice investors to buy Intel stock if one also takes into account Intel’s efforts to compete.
Investing in Intel
Ultimately, the government’s support and desire to produce chips in the U.S. should provide a tailwind for Intel stock. Admittedly, the company has lagged the peers it has dominated in recent decades.
However, Intel has shown that it will do what it takes to become one of the most advanced chip makers. Thanks to the U.S. government’s desire for a homegrown chip manufacturing industry, Intel’s foundry footprint could make its success critical to the U.S. government, making it more likely to win in the market.
This means that even if Intel lags behind Nvidia in AI chips, its efforts to close the technology gap could improve its sales in the near future. With the market valuing the stock at slightly more than the value of assets minus liabilities, patient long-term investors could benefit by taking a position in Intel at current levels.
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Will Healy has positions in Advanced Micro Devices and Intel. The Motley Fool holds positions in and recommends ASML, Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
Intel Stock Drops, But Are They Out? was originally published by The Motley Fool
