Intel Corp. (INTC, Financial) has seen its stock drop 44% this year as the chipmaker continues to suffer in amid continued market share loss and an unfavorable economic environment. This has been a challenging year for semiconductor companies, with declining demand, rising inflation and oversupply sending shares of semiconductor companies plummeting. There's also the unfavorable comparisons to pandemic-related growth years to contend with.
Despite the struggles many semiconductor companies are facing today, it would stil be reasonable to assume that the tech sector will play a pivotal role in the recovery phase of the business cycle. For this reason, I'm looking into undervalued semiconductor stocks, and Intel, which could play an important role in the ongoing digital transformation, falls within this radar.
Intel has been the industry leader for a long period of time, but its research and development challenges have led to other chipmakers capturing market share. The company has so far failed to gain an edge over its competitors in the last few years and repeatedly missed targets. This begs the question, can the company and the stock really recover, or will they stay low for the long-term? CEO Pat Gelsinger is attempting to restore Intel's market position with new initiatives including extensive investments in returning to the foundry business, but this plan is not guaranteed to pay off and requires heavy expenditure.
Intel reports declining revenue, but there are positives
Intel posted earnings of 59 cents per share for the third quarter, compared to earnings per share of 32 cents projected by analysts. Net income, however, was down 59% year-over-year in the third quarter. Revenue came to $15.3 billion, down 15% year-over-year due to a decrease in demand. Client computing group revenue fell 17% to $8.1 billion because of weak PC demand. According to Gartner, global PC shipments fell over 19.5% in the third quarter, reaching 68 million units. Meanwhile, the company debuted the 13th Generation Intel Core processors, the world's fastest desktop processors, as well as Intel Unison to enable best-in-industry multi-device user experiences.
The company also saw sharp declines in its data center and AI group segment as it shipped fewer server processors. The segment's revenue fell 27% year-over-year to $4.2 billion. The company made some headway with Alphabet's (GOOG, Financial)(GOOGL, Financial) Google introducing its C3 machine series, which is powered by Intel's 4th Gen Xeon Scalable processor and Google's proprietary Intel Infrastructure Processing Unit E3200.
The network and edge group segment generated $2.3 billion in revenue, a 14% rise driven by the strength in 5G, edge and ethernet products. Intel’s developing business division, accelerated computing systems and graphics group brought in $185 million in revenue, an increase of 8%, while Intel foundry services revenue decreased by 2% to $171 million.
On the positive side, the company stated that Nvidia (NVDA, Financial) has agreed to participate in the U.S. Department of Defense's Rapid Assured Microelectronics Prototypes – Commercial (RAMP-C) initiative, which was announced in August 2021. The DoD awarded Intel a contract to provide commercial foundry services in the first phase of the RAMP-C program. Furthermore, since the second quarter, Intel has increased engagements with seven of the 10 largest foundry customers.
Mobileye (MBLY, Financial) revenue increased by 38% to $450 million in the third quarter, which is a promising sign, though investors should note that Intel recently spun off this division into a separate company, so it will no longer be part of results going forward. Mobileye develops advanced driver assistance and autonomous driving technology. Intel will still likely benefit from parterships with this spinoff.
Intel revenue by segment
Source: Company earnings presentation
Intel said its profitability for the fourth quarter of 2022 and the entire year will be lower than expected, owing to the slowing economy, supply chain issues and competitive pressures. The management has reduced its revenue expectation for the fiscal year to a range of $63 billion to $64 billion, down from $65 billion to $68 billion before. For the fourth quarter, the company expects revenue in the range of $14 billion to $15 billion, down 23% to 28% year-over-year.
The company announced a plan of a $3 billion reduction in sales and operating expenses in 2023 to achieve savings between $8 billion and $10 billion by 2025, which is a welcome sign for investors who have been criticizing the company’s cost structure for several years. Although a company should not depend on cost cuts to drive earnings growth, at a time when macroeconomic conditions are not supportive of growth, tech companies need to take bold decisions to maintain a certain level of financial strength.
Despite declining growth, Intel announced several organizational reforms aimed at accelerating product innovation and capturing growth in both traditional markets and high-growth emerging markets. Intel is heavily investing in the development of new semiconductor foundries in the U.S., which could be a revenue generator in the future. In the third quarter, Intel also introduced the Semiconductor Co-Investment Program, a new funding approach for its capital-intensive requirements. As part of SCIP, Intel announced a definitive agreement with Brookfield Asset Management (BAM, Financial), one of the world's leading alternative asset management firms, under which they will jointly invest up to $30 billion in Intel's Ocotillo campus in Chandler, Arizona.
Takeaway
Intel has come under a lot of pressure due to its market share loss and the tough economic environment, and its prospects for future expansion are still unclear. Intel's short-term future is undeniably bleak and there is no clarity about the company’s ability to ride this wave of challenges. Although Intel has a strong operational base and is investing substantially to become a noteworthy player in the foundry business in a bid to recoup lost market share, it is too early to comment on whether this approach will be successful. Investors, therefore, will have to patiently wait for the next business cycle to see whether Intel’s efforts will yield positive results in my view.
Based on Intel’s current revenue levels, the company is still an industry leader, and with government assistance and the release of newer chips, the company is likely to be back on track in a few years. At a price-earnings ratio of less than 10, Intel is trading well below the five-year average price-earnings ratio of 12.68. Considering the company's efforts in product innovation and expansion, long-term-oriented investors may find Intel stock an attractive bet today, but investors looking for quick gains might want to avoid the company altogether as investors need to give time for Intel to execute its turnaround plan successfully before seeing capital gains.
