Will Intel Go Bust?

On August 1st, Intel (NASDAQ:INTC) released its Q2 earnings report, much to the chagrin of longtime shareholders.

In the release, the company reported a 1% year-over-year revenue drop alongside a quarterly net loss of $1.6 billion. Much more concerning was the company’s plan for a cost reduction campaign that involved layoffs, reduced capital expenditures and a suspension of the company’s quarterly dividend.

The market reacted sharply to the negative results and similarly negative forward guidance found in the Q2 report. On a 30-day basis, shares of INTC have fallen by more than 40%.

Nearly every analyst update on the stock since August 2nd has involved a rating downgrade or a reduced target price. The question now is whether Intel is apt to go bust or if the company can recover from what seems to be a crisis in investor confidence.

Breaking Down Intel’s Headwinds

Intel’s biggest problems are its lackluster growth and its lack of investment in emerging AI technology to remain competitive.

In the forward fiscal year, analysts expect Intel’s revenues to decline by a further 3.2% while EPS drops by another 11.5%.

The company’s skepticism of generative AI, meanwhile, caused it to miss an opportunity to acquire 15% of OpenAI for just $1 billion before the introduction of ChatGPT. While a degree of skepticism regarding AI hype is likely healthy, Intel’s procrastination in presenting an AI strategy has put it at a considerable disadvantage to the likes of NVIDIA and AMD.

Intel also significantly lags competitive chipmakers in terms of profitability. In the last full fiscal year, the company reported a net margin of just 1.8%. AMD, NVIDIA and TSMC achieved net margins of 5.8%, 53.4% and 37.9%, respectively. With net income now turning negative, the divide between Intel and its peers is even sharper.

A large part of the reason for this lagging profitability is the company’s foundry business. Most American chip companies don’t actually fabricate their own chips, instead preferring to outsource them to the likes of TSMC in markets where production is more affordable.

Intel, however, has clung on to its legacy foundries and has continued to make the bulk of its own chips in-house. While in many industries this would provide advantages of vertical integration, the foundry business has been a consistent losing proposition for Intel. With competitors getting chips made more cheaply overseas, Intel has been unable to keep up with the modern chip market.

Another potential problem for Intel is its growing debt load. At the end of 2019, the company had $25.31 billion in long-term debt. As of the end of Q1, that number had ballooned to nearly $48 billion.

Though the company’s debt-to-equity ratio is still a manageable 0.4, the explosion of debt in such a short time could suggest that the company’s financial position is gradually weakening.

Most concerning, perhaps, is the strong possibility that Intel is still overvalued even after having fallen so much and lagging behind its market. The clearest sign of overvaluation is the company’s price-to-earnings-growth (PEG) ratio, which currently stands at 3.3.

The stock also trades at about 52.1 times forward earnings, an extremely high ratio for a company that is struggling with growth. These ratios are somewhat offset by reasonable price-to-sales and price-to-cash flow ratios of 1.5 and 7.4, respectively.

On the whole, though, Intel still looks a bit expensive when its expected growth is taken into account.

The Positive Case for Intel

From all of the information above, it may seem that Intel is on an inevitable downward trajectory. It’s important to remember, however, that there are still at least a few things going for the company.

First and foremost is the fact that Intel is still by far the dominant force in the computer CPU market. In 2023, Intel is estimated to have shipped about 50 million CPUs. AMD, the closest competitor in this space, shipped just 8 million.

Government action could also help rescue Intel. The federal government has already proposed an $8.5 billion direct subsidy to help Intel create new manufacturing jobs in the US.

If the government determines that Intel is of strategic and economic importance, ongoing support could turn the company’s foundry business from one of its biggest liabilities into a major asset.

There is some risk associated with this positive, though, as it’s still uncertain whether direct support for Intel will still be a priority after November’s election.

Finally, Intel is rushing to catch up with the times by rolling out a comprehensive AI strategy. The company plans to focus on CPUs for AI-enabled PCs, an area where Intel can likely compete very effectively.

Due to changing technologies and the age of the current installed base of PCs, tech analysts expect a considerable refresh to occur over the next two years as businesses and consumers replace old, outdated devices. This could be a major boon for Intel, assuming it can catch up with AI trends and retain its dominant position as a CPU provider.

So, Will Intel Go Bust?

Intel is not likely to go bust anytime soon in spite of its high debt load and poor earnings results.

With poor profitability, limited near-term growth prospects and a business model that puts it behind many of its competitors, there’s little doubt that Intel is struggling.

However, it’s important to keep in mind that the company is still an unquestionable leader in the field of computer CPUs, a fact that will likely keep it going for many years to come.

Wall Street, though, doesn’t appear to be especially enthusiastic about the stock. At the moment, just 13% of the analysts covering INTC rate it as a buy.

Ultimately, Intel may be a sell at the moment, as the stock seems unlikely to deliver strong returns and the elimination of the dividend has ended its ability to produce income for investors. As to whether the company itself will go bankrupt or cease to exist, however, both outcomes seem unlikely at the moment.

Intel’s market position, incoming government support and the possible benefits of its AI strategy are all positives that could help keep the company afloat. So, while Intel shares may not look like a particularly attractive investment right now, the chances of the company itself actually going bust seem minimal.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.