As investors surely already know, leader Intel Corp (INTC) has become the black sheep of the semiconductor family. By being late to the shift from CPUs to GPUs, Intel has lost industry leadership to Nvidia (NVDA) and its long-term competitor Advanced Micro Devices (AMD). That fact becomes abundantly clear when you recognize that the market capitalization of NVDA stock is now roughly 40 times that of Intel.
With Intel stock at low levels, new leadership at the company, as well as some interest in acquisitions since Intel’s dark days in August, many investors may be optimistic about a change in Intel’s valuation. In the current situation, I prefer to wait but earn income from the commitment to buy INTC shares at a lower price. Officially, I offer a Hold rating on INTC.
Although the stock has seen larger market cap losses, Intel stock’s 26% drop on August 1, 2024 was its biggest percentage move down in at least the last decade. It was also preceded and followed by trading days with losses of more than 5%. The company has certainly disappointed investors before, but after reporting its second-quarter 2024 results, there was little appetite from contrarian investors to buy the dip. Some analysts questioned Intel’s entire business relevance when margins fell sharply and the company announced plans for layoffs.
The company also suspended its dividend. Those looking closer noted that Intel’s free cash flow (FCF) had turned negative in 2022 and that the company had nearly $30 billion of net debt against declining outlooks. Intel had been spending more money than it had received since early 2023, and its second-quarter 2024 results essentially served as D-Day for the company’s existing arc and strategy.
Although there has been substantial pain for investors, INTC shareholders should be grateful that very few large dividend funds/ETFs owned the stock this summer. Otherwise, sales would have been much worse.
I still believe Intel has value. The company has tens of thousands of patents and a long reputation for reliable chips. While the company’s reputation with investors may be severely damaged, its reputation among long-time PC customers should be less damaged. That part of the business should continue to move forward as the company works to get back on track and advance its technological competitiveness for the AI era.
In terms of graphics processing units, I imagine the new leadership team is setting modest goals. Challenging Nvidia and AMD head-on doesn’t seem realistic, at least not in the short term. Working to find an operable niche, like the Arc B580, which has garnered some favorable reviews within the value space, seems like a good medium-term goal.
I think the company will have many restructuring options to consider, such as splitting the Foundry and Products businesses, as has been rumored, and/or selling part or all of the company. I think it’s a positive sign that Intel hasn’t rushed to consummate any transactions with Qualcomm (QCOM) or other interested parties yet. No company wants to sell its business at its peak point of weakness unless absolutely necessary.
One of the things that does concern me is the co-CEO situation that is now established between Michelle Johnston Holthaus and David Zinsner. With so many important decisions to make, having two people at the helm could cause some deadlocks.
INTC stock fell slightly below the $20 level in August/September, but rose above $26 after better-than-expected third-quarter results in early November. It was a relief for investors to see margins recovering. However, that shine has worn off and the stock has returned to the $20 range following the retirement of former CEO Pat Gelsinger.
I think there could be another drop in INTC stock, potentially as early as this month, due to tax loss selling. Additionally, some actively managed funds may wish to remove INTC from their annual reports through 2025.
When Intel stock plummeted in August, I sold puts at $17.50, and these recently expired, allowing me to pocket the premiums. I recently re-entered that trade and wrote some $18 puts on INTC for April 2025, which are trading at a premium of about $1.17 (or $117 per contract). If Intel stock falls below $18 and the puts are exercised against me, I will have basically entered a long position in INTC at $16.83. It’s definitely a level I feel comfortable at.
If INTC stock stabilizes and does not fall below $18 by April 17, 2025, I will be able to retain the option premium of ~$117 per contract.
A large number of Wall Street analysts remain undecided when it comes to Intel stock. Of the 29 analysts covering INTC, there is only one Buy rating, compared to 22 Hold ratings and six Sell ratings. However, INTC’s average price target is $24.43 and represents more than a 20% upside from the current stock price.
See more INTC analyst ratings
While I think Intel can recover, I’m not ready to buy common stock just yet. There is a reasonable risk that the stock could retest its low of $18.51 from early September 2024 as the market weighs the new leadership team. While the company is likely to post a full-year loss in 2024, analysts, on average, expect a recovery to EPS of $0.98 in 2025 (although estimates are wide).
That would put INTC stock at a forward P/E of about 21 times, which is not at all a bargain price for a company with the uncertainties it has. I would rather commit to buying INTC at a 17x forward P/E by selling the $18 April 2025 puts and making some income if the option doesn’t redeem against me. I officially have a Hold rating on Intel stock right now, as does most of Wall Street.
