A new bull market is now in full swing, fueled by accelerated computing infrastructure, artificial intelligence (AI) systems built on that infrastructure, and increased interest from governments around the world to “relocate” chip manufacturing to their soil. Intel (NASDAQ:INTC) appears well-positioned to be a key beneficiary of these growth trends.
Despite this apparent enthusiasm, the stock’s performance has lagged far behind the broader market and other leading chip stocks.
The company appeared to have regained some momentum over the last year, but extremely poor financials in its manufacturing segment have many investors taking a closer look.
The situation at Intel
Intel is trying to become the “national hero” in U.S. chip manufacturing. It has received billions of dollars in grants and tax incentives from the U.S. CHIPS Act, similar support from the European Union’s Chips Act, and private investments from infrastructure investors Brookfield.
The reason Intel has narrowed its focus on overhauling its chip manufacturing is because of its dominance Taiwan semiconductor manufacturing (NYSE:TSM), the giant third-party chip foundry that now produces about 90% of the world’s most advanced semiconductors (including many of Intel’s most advanced chips). Many investors are concerned about the impact of a possible Chinese invasion of Taiwan. Additionally, Western governments want greater resilience in chip manufacturing, which is actually another way of saying they want more semiconductor manufacturing moved outside of China’s potential sphere of influence and to their own shores.
That’s why Intel is seeking these government funds to build a manufacturing infrastructure that can compete with TSMC and offer something similar to top chip designers Nvidia, modern micro devicesAnd Qualcomm an alternative fab shop.
The glaring problem, however, is that Intel has just confirmed what some investors had always feared: its manufacturing operations (a division now called “Intel Foundry”) are experiencing steep losses. On Intel Foundry sales of $18.9 billion, the company generated an operating loss of $7 billion in 2023. (Most of these sales come from Intel’s “Product” segment, which was restructured to report as a non-manufacturing design house.)
This is not a new development either. Under these new reporting standards, Intel revealed that even during the previous chip manufacturing boom, Foundry generated operating losses of $5.1 billion in 2021 and $5.2 billion in 2022.
Is this a chip manufacturing financing or a bailout?
Intel management has an unclear timeline for pulling the foundry segment out of deep crisis, although CEO Pat Gelsinger said the unit should break even within the next few years. That’s not exactly heartwarming news. While Intel is resorting to government funding to fix the problems in its business model, there are other semiconductor manufacturers (including TSMC) that are already making big profits.
Of course, one way to look at this is that Intel is on a roll from here on out as the company solves problems and gets enough funding to build a robust chip manufacturing facility that isn’t located in Taiwan. But Intel isn’t the only company receiving government money. This also applies to TSMC. The company was just awarded up to $6.6 billion in direct funding from the U.S. CHIPS Act, as well as an additional $5 billion in loans and other tax incentives, to bolster the facilities it is building in Arizona and to expand.
Given the mountain Intel has to climb, it’s not even a cheap stock. It trades at 28 times expected 2024 earnings per share (EPS) and more than 16 times expected 2025 earnings per share (EPS). It is also important to remember that EPS does not take into account the large capital expenditures that the company will have to make in the next few years, expenditures that will certainly exceed the government support it receives.
In short, Intel is a really difficult stock to own right now. Investors looking to bet on a recovery should size their position in this company accordingly. Meanwhile, many other semiconductor companies are in really good shape as this bull market gets rolling.
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Nicholas Rossolillo and his clients hold positions at Advanced Micro Devices, Nvidia and Qualcomm. The Motley Fool has positions in and recommends Advanced Micro Devices, Brookfield Corporation, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Brookfield 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 Just Revealed Why It Can’t Ditch Its Manufacturing Model and Why the Stock is a Hold Stock at Best was originally published by The Motley Fool