It’s been a tough year for Intel (NASDAQ: INTC). Its share price has effectively halved since January 1 and it was withdrawn from the market Dow Jones Industrial Average index in November. To make matters worse, Intel tried to buy the company in 2005: Nvidiahas become the second largest company in the world (by market capitalization) and replaced it in the Dow Jones.
But a new year is upon us, and with it comes the potential for change. Is Intel ready for a recovery in 2025?
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A quick look at Intel’s Q3 numbers shows why the stock is struggling. The chipmaker saw a 6% year-over-year decline in revenue, while going from an adjusted earnings per share (EPS) of $0.41 last year to a loss per share of $0.46 this year. The semiconductor company’s biggest problem is its third-party foundry business, which it launched in 2021 to boost growth. Instead, it piled up the losses.
In the third quarter, its foundry operations saw revenues fall 8% year-on-year to $4.4 billion, while the division’s operating losses shot up to $5.8 billion from $1.8 billion a year ago . The results included an impairment charge of $3.1 billion. But even without the impairment, the loss would still have risen to $2.7 billion.
Going forward, the company is working to turn its foundry operations into an independent subsidiary, which it believes will better serve customers and enable external financing. It could also be a precursor to the company that eventually wants to spin off the company.
Intel expects the foundry company’s operating loss to improve next year as it transitions to new nodes with better cost structures and realizes cost savings thanks to its restructuring plans. However, the company then received bad potential news The New York Times reported that the Biden administration wanted to reduce the $8.5 billion CHIPs Act grant the company was supposed to receive, while rival Taiwanese semiconductor manufacturing a $6.6 billion subsidy to build foundries in the US On Tuesday it was announced that Intel will actually receive $7.86 billion. The slightly lower amount was in addition to the $3.3 billion already awarded by Intel through a Department of Defense contract that used CHIPs Act funding.
Outside of the foundry business, Intel’s other businesses have been a mixed bag. On the plus side, the data center and artificial intelligence (AI) segment performed well last quarter, with revenue up 9% year-over-year to $3.3 billion. This is well below the growth of most companies in the data center space, and the company said the Gaudi 3 AI accelerator would not meet 2024 revenue targets.
Meanwhile, after strong results from its client computing group in the first half of the year, when it posted 31% revenue growth in the first quarter and 9% revenue growth in the second quarter, the segment saw revenue growth in the third quarter by 7%. But going forward, the company is looking to use Intel Core Ultra 200V series processors, previously called Lunar Lake, to boost its AI PC business, while the new Arrow Lake will drive desktop revenue growth. The company will launch its first central processing unit (CPU) based on its new 18A technology, Panther Lake, in the second half of next year.
Intel’s other businesses have also struggled. Subsidiary Altera saw sales fall 44% year over year, although sales rose 14% sequentially and posted a small operating profit. The company plans to spin off the company through an initial public offering (IPO) in the future.
Meanwhile, the company’s subsidiary Mobileye, which deals with autonomous driving chips, saw its sales fall 8%. The acquisitions of both companies have proven to be mistakes so far.
Intel appears to be on its way to splitting up the company, which would likely be good for investors.
While the core product business isn’t setting the world on fire, it’s solid. This company is on track to generate approximately $12.6 billion in operating revenues this year, which equates to approximately $2.20 in earnings per share. (This assumes a 25% tax rate and 4.3 billion shares.) A price-to-earnings (P/E) ratio of 10x to 12x on just the core business would equate to a stock price of $22 to $26.
While its foundry business is struggling, Intel has real physical assets. The company had $104 billion in physical assets on its balance sheet as of the end of 2021 and has spent approximately $68.5 billion on capital expenditures (capex) since the end of 2021, which mainly went to this business segment. Using just the capex figures, we can value Intel’s foundry business given the amount they spent on foundry assets.
However, the company does have net debt of approximately $26 billion, which we can also attribute to this company. That would value its foundry business minus debt at about $10 per share.
The nearly 88% stake in Mobileye, meanwhile, is worth about $12.8 billion, or about $3 per Intel share. The Altera activities also have some value.
All told, a broken-up Intel could be worth between $35 and $40 per share, which would represent a significant upside from current levels. With the company seemingly taking steps to spin off some of its business, it looks like Intel could represent good value at current levels as its shares see a recovery in 2025.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Mobileye Global and recommends the following options: Short February 2025 $27 calls on Intel. The Motley Fool has a disclosure policy.
Is Intel Stock a Buy Now? was originally published by The Motley Fool
