The rise of artificial intelligence (AI) produced massive demand for semiconductor chips capable of supporting the sophisticated needs of AI systems. This, in turn, increased the stock price of many semiconductor chip providers, notably Nvidia.
Veteran chipmaker Intel (INTC +2.59%) was among those with a surging stock price over the past year, reaching a 52-week high of $51.28 in December. Since then, however, Intel shares have dropped.
This could signal a buy opportunity. But don't let the current excitement around AI cloud your judgment. Not all semiconductor companies can achieve the success Nvidia has experienced. So, before scooping up Intel shares, it's best to understand whether the company makes sense as a long-term investment.
NASDAQ: INTC
Key Data Points
Intel's transformation
Intel underwent a remarkable turnaround over the past year. The company started 2023 with first-quarter revenue of $11.7 billion, which represents a 36% year-over-year decline. The veteran tech giant also suffered a Q1 net loss of $2.8 billion, compared to net income of $8.1 billion in 2022.
Intel was a different company by the end of 2023. Its $15.4 billion in revenue was a 10% year-over-year increase, and it was once again profitable with Q4 net income of roughly 2.7 billion, thanks to $3 billion in cost cuts.
Intel's Q4 sales benefited from strong PC demand. Over the long term, the chipmaker is focused on its integrated device manufacturing (IDM) model as its strategy to maintain revenue growth.
IDM involves the company both designing and building its own semiconductor chips. By contrast, Nvidia is a fabless chipset maker, meaning it outsources the fabrication of its semiconductors.
Intel is confident it will continue to see year-over-year sales growth in every quarter of 2024. For Q1, the company forecasted revenue of at least $12.2 billion, up from 2023's $11.7 billion.
Intel's aspirations
Intel management is touting what they call IDM 2.0 as a competitive advantage in the era of AI, given the demanding hardware requirements of AI systems. IDM 2.0 entails opening up Intel's foundries -- used to make the company's semiconductors -- to other organizations.
The company believes offering its foundry capabilities to others is a successful strategy because it allows Intel to efficiently build AI chips to the specifications of its customers. According to CEO Pat Gelsinger, Intel is "the only semiconductor company with at-scale and sustainable manufacturing in every major region of the world."
This positions Intel to deliver products faster while remaining resilient against supply chain bottlenecks. With IDM 2.0, Intel seeks to become the second-largest foundry in the world by 2030, behind leader Taiwan Semiconductor Manufacturing Company (TSMC), which dominates today's semiconductor manufacturing industry.
Intel is in the early stages of IDM 2.0. In 2023, the company's foundry services accounted for only $952 million of the company's $54.3 billion in revenue.
But Intel's foundry aspirations may be on the cusp of substantial growth. In February, the company announced its foundry business secured deals worth more than $15 billion over their lifetimes, capturing customers such as Microsoft.
To buy or not to buy Intel
Intel's foundry business is showing promise with these new deals. And this division's $952 million in 2023 revenue was a 103% increase over 2022.
But expanding its foundry capacity to meet customer demand will be a substantial capital expenditure. For example, when Intel announced it was building two new factories in 2021, it quoted a cost of $20 billion.
Moreover, despite the strong demand for AI-powering chips, Intel's data and AI division generated $15.5 billion in revenue last year, down from $19.4 billion in the year prior. This indicates Intel still has to prove it can succeed against rivals in the AI race.
The other consideration is the company's price-to-earnings ratio (P/E ratio). Intel's P/E ratio of 105 exceeds Nvidia's 76, suggesting Intel's current stock price is already lofty.
Corroborating this is the prediction among Wall Street analysts of a median price target of $45.07 for Intel stock. This illustrates a belief among analysts of little upside for Intel shares right now.
With a high valuation and limited success demonstrated in Intel's financials so far, at this time, it's best to wait and see how the company performs over the next couple of quarters before deciding to invest. If its operations continue Q4's encouraging performance, then Intel may become an attractive long-term investment. For now, it's best to see first how Intel fares on its path to becoming a top contender in the chip fabrication industry.
