To The Moon

$Intel(INTC)$

Intel has been one of my most disappointing stock ratings in 2024. I rated it as a "sell" for the year, the stock has dropped over 60% as of this recording, with only one trading day left in 2024. The question now is: Do I still think Intel is a "buy" for 2025? In this article, I’ll answer that by analyzing various financial metrics, including my recently updated discounted cash flow valuation model and the forward price-to-earnings ratio, to determine whether Intel is a buy, hold, or sell heading into the new year.

The company also faced significant shifts in market position, including being replaced by Nvidia in the Dow Jones Industrial Average. Intel’s 2024 performance lagged behind its semiconductor peers, as evidenced by its dark-red status as the sector’s worst performer. A broad-based semiconductor investment would have yielded better returns.

The firing of CEO Pat Gelsinger, the ongoing search for a new leader, and Bloomberg’s latest report, which reveals that Intel’s new management is considering splitting the company’s manufacturing and design divisions—something the former CEO strongly opposed.

Intel CFO David Zinsner recently acknowledged that the formal separation of the company’s manufacturing and product development divisions is now an open question—marking a notable shift from prior management’s stance. Under the previous CEO, the company reportedly resisted acquisition offers and rejected the idea of selling parts of its business. This indicates a possible internal split between the former CEO’s vision and that of other senior leadership, potentially leading to his early exit.

When Pat Gelsinger was appointed CEO, he was upfront about his ambitious strategy: making significant capital investments to modernize Intel’s manufacturing capabilities. He emphasized to the board that this approach was necessary to regain technological leadership. Capital expenditures soared to nearly $30 billion at their peak during his tenure, even as revenue and cash flow from operations declined. It was a high-risk strategy, and the board ultimately decided to cut it short, prompting Gelsinger’s departure.

In the wake of his exit, Intel is now led by co-CEOs Michelle Johnston and David Zinsner. The abrupt nature of this leadership change, without a clear successor lined up, suggests a deep dissatisfaction with the former CEO’s strategy. However, investors responded slightly positively to the leadership shakeup, perhaps hopeful for a new direction.

Speculation about a potential split of Intel’s manufacturing and design divisions has also intensified. Unlike most semiconductor companies, which focus on either design or manufacturing, Intel has historically done both. Critics argue this dual focus has hindered the company’s performance. A split could allow Intel to streamline operations and focus on its core strengths.

Some investors even speculate that Taiwan Semiconductor Manufacturing Company (TSMC) might be interested in acquiring Intel’s manufacturing assets. Such a deal could provide TSMC with much-needed capacity expansion and geographic diversification while injecting tens of billions of dollars into Intel, allowing it to focus exclusively on design. However, for now, these discussions remain speculative.

Intel’s struggles have been widely publicized, culminating in the forced retirement of its CEO and the appointment of a new leader. The company’s revenue tells the story: down to $54 billion over the trailing 12 months, a sharp decline from nearly $80 billion in 2022. Intel has lost market share across all segments and fallen behind competitors in key technologies. Under its previous CEO, the company attempted to close the gap by investing tens of billions of dollars in manufacturing expansion and technological advancements. However, these investments have drastically reduced cash flow and led to the suspension of its dividend—a move that triggered a significant selloff among investors.

These challenges have also strained Intel’s balance sheet, pushing its debt to over $50 billion while cash reserves have dwindled to under $9 billion. With continued negative free cash flow expected for the foreseeable future, borrowing costs have risen, reflecting the increased risk to creditors.

Despite these difficulties, Intel's stock is trading at historically low valuation levels. My updated discounted cash flow model estimates the intrinsic value of Intel shares at $36, compared to the current market price of $20-23. Even accounting for several more years of forecasted negative free cash flow, this suggests the stock is significantly undervalued.

A discounted cash flow (DCF) valuation suggests a fair value of $27/share, implying a 31% upside from current levels. Adjusted scenarios could see this rise as high as $48/share, but uncertainties warrant caution.

Intel trades at a forward P/E ratio of 21, lower than the sector’s median of 25, reflecting its discounted valuation amid recent challenges. While its profitability grades favorably, growth remains a concern, with revenue and earnings metrics under performing peers.

So, is Intel a buy, hold, or sell for 2025? In my view, it remains a risky "buy." While the benefits of Intel’s strategic investments are unlikely to materialize in 2025, I believe the long-term reward potential outweighs the risks for investors willing to hold the stock for 5 to 10 years. Investors should approach Intel with caution until stronger evidence of a turnaround emerges.

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