Intel (NASDAQ: INTC) had its big coming-out party on Tuesday, but the chip stock didn’t get the reception it expected.
The company recast its financials to reflect that it sees its foundry as much more central to its business. However, investors were disappointed by the actual numbers, and share prices fell 8% on the news. Intel’s restated financials showed that its foundry division had a $7 billion operating loss in 2023, which followed losses of $5.2 billion in 2022 and $5.1 billion in 2021. Nonetheless, management issued a bold set of goals and a vision for the foundry business and the company overall.
Intel share prices are now down more than 20% from their 52-week peak in December and trade at their lowest point in four months. In addition to the sell-off after restating its financials, the stock also declined sharply on its fourth-quarter earnings report in January as investors were disappointed by management’s guidance.
So is Intel a buy after the sell-off? Let’s take a look at the company’s vision for a new era.
Intel in 2030
Unlike many of its semiconductor competitors and peers like Advanced Micro Devices, Nvidia, and Broadcom, Intel owns its own manufacturing plants, and the company sees third-party manufacturing work, like what Taiwan Semiconductor Manufacturing (NYSE: TSM) and Samsung do, becoming a more significant part of its business.
Intel said its pivot to the foundry operating model will drive increased efficiency and cost discipline, and it said Intel Foundry would be the “world’s first systems foundry for the AI era.”
The company is aiming for a 60% adjusted gross margin in 2030 and a 40% adjusted operating margin by then, but Intel hasn’t had a gross margin of 60% in roughly five years, and its operating margin hasn’t topped 40% since the 1990s.
It also just completed a year in which it made only $93 million in operating income, though that was primarily due to a slowdown in PC sales following the pandemic.
Given the company’s current financials and its historical performance, reaching those margins will be a tall task for Intel, and will take more than just planning. It will have to beat competitors and catch up in advanced manufacturing processes.
Additionally, management said that Intel Foundry’s losses would peak this year, but it expects to reach breakeven in the foundry business by 2027. By 2030, it called for an adjusted gross margin of 40% in the division and a 30% adjusted operating margin in the foundry segment, and it aims to become the second-largest foundry by 2030.
Getting to that point, where its foundry margins are approaching those of TSMC, won’t be easy. TSMC owns roughly 90% of the third-party advanced chip manufacturing market, and it’s unlikely to yield that without a fight. Intel fell behind TSMC when it failed to adopt advanced extreme ultraviolet (EUV) technology, and it’s still playing catch-up.
Additionally, chip manufacturing is a technical, challenging industry, and TSMC has said that the opening of its Arizona chip factory would be delayed because it can’t find enough skilled workers.
That problem won’t be easily solved and is likely to present challenges for Intel as well.
Is Intel a buy?
The investor pessimism in response to Intel’s 2030 targets might not be an overreaction. The company has a steep hill to climb at the moment, and it seems to be operating at a competitive disadvantage against TSMC as it will face challenges like hiring a skilled workforce and scaling up its plants to meet modern demands.
Investors would likely bid the share price higher if Intel can show progress toward those goals, but that will take time considering the company forecasts an even wider loss in the foundry division this year.
Investors are better off staying on the sidelines until Intel can demonstrate it’s truly transformed itself and is back to steady growth.
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Jeremy Bowman has positions in Broadcom. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
Intel’s Stock Price Just Plunged. Is Now the Time to Invest? was originally published by The Motley Fool
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