(INTEL)LIGENT investment ? Experts Weigh In.
So much have happened to $Intel(INTC)$ lately.
From its weak last quarter earnings to its stock price crashing “big time”, what does the future holds for this former #1 chip maker?
To be able to own your point of view, it is necessary to understand what have transpired so far.
The Big Picture.
(1) Q2 2024: Earnings.
Revenue: was $12.83 billion vs $12.94 billion expected vs -0.77% YoY loss from $12.9 billion (Q2 2023)
Earnins per share (non GAAP) : was $0.02 vs $0.10 expected vs -85% YoY loss from $0.13 (Q2 2023).
Its weak earnings were primarily due to weaker-than-expected performance in its PC segment, that has been steadily eroded by competition in recent years.
In a bid to halt erosion rate, a decision to more rapidly produce Core Ultra PC chips that can handle artificial intelligence workloads contributed further to the loss.
(2) Q3 2024 Outlook.
Compounding the already disappointing earnings was the dim outlook for following Q3 2024, that further dampened investor sentiment.
This led to a significant plunge in stock price, following earnings announcement and it has not recovered since. (see below)
(3) Intel Performance.
Before Q2 2024 earnings report, Intel stock price was averaging in the $30+ band. (see above)
Post 01 Aug 2024 after earnings were announced, it has stayed below the resistant level of $25.
(4) Remedial Action Plan.
Management team had swung into “defensive” mode to see how best to get Intel out of the current rough patch, through a series of action items. (see below)
(1) Cost Reduction and Restructuring:
Layoffs: Intel announced substantial 15,000 jobs layoffs, targeting positions across various departments to reduce operational costs by end 2024.
Manufacturing Adjustments: The company has been reassessing its manufacturing strategy, that included delaying the construction of the chip plant in Eastern Germany by 2 years.
(2) Company Restructure.
New operating model: Implementing a new structure with separate financial reporting for Intel Products and Intel Foundry to improve efficiency and decision-making.
Operation Expenses (Opex) reduction: Aims to reduce operating expenses to approx. $20 billion in 2024 and $17.5 billion in 2025, a 20% reduction from prior estimates.
Capital efficiency: Scrutinizing capital investments more rigorously and aligning them with market signals and foundry commitments.
Accelerated product transitions: Moving production of (i) Intel 4 and (ii) 3 wafers from Oregon to Ireland, to improve long-term cost structure & efficiency.
Focus on AI PC market: Investing in the AI PC category, which is expected to grow from less than 10% of the market to over 50% by 2026.
Advancing process technology: Continuing to invest in leading-edge nodes (Intel 18A, 14A, and 10A) to improve competitiveness and reduce reliance on external foundries.
Continue with product launches (planned). Intel to remain on track to deliver powerful AI systems with optimal performance per watt and lower total cost of ownership (TCO). (see above)
Expanding foundry services: Grow its Intel Foundry business, with a focus on advanced packaging technologies. So far, it has made baby-progress, securing 2 contracts. (see above)
(5) Working Capital.
Although Intel has been allocated (in principal) $3.5 billions of US government CHIPS act funds, the monies have not been dispensed yet and there is no news when it will be.
It badly needs funds to help tide over its current situation.
How likely is it that Intel will accept Apollo Global Management's offer to invest up to $5 billion, in the form of an “equity-like investment” ?
The 2 companies already have a working relationship, with Apollo having paid $11 billion for a 49% stake in a joint venture (JV) set up to finance the construction of Intel’s Fab 34 chip factory in Ireland.
What The Experts Think ?
Given the up-to-date status on Intel, Wall Street analysts have the following takeaways:
Strategic Shift Towards AI and Edge Computing
(1) Bernstein Research, Senior analyst, Stacy Rasgon:
On 9 Aug 2024, he commented - Intel will be at least 2 years from success in its Foundry business. He has a “Hold” rating on the chip maker.
(2) Bank of America, Senior semiconductor analyst, Vivek Arya :
On 6 Oct 2024, he commented - there are just too many challenges the company needs to address before it can be considered ready for investment again.
Fundamental view remains “underperform” as Intel faces a unique confluence of competitive, financial and strategic threats with no immediate positive catalyst,
(3) JP Morgan Chase, Executive director, Harlan Sur :
On 21 Sep 2024, his comment {on Intel spinning off the Foundry business as a standalone entity}, “we believe this move is a natural progression to drive better transparency and decision making/efficiencies and therefore should not be viewed as a surprise”.
(4) Goldman Sachs, Managing director, Toshiya Hari :
On 10 Sep 2024, he commented that Intel faces an "uphill battle" to turn itself around and compete with its peers like $Advanced Micro Devices(AMD)$, $Taiwan Semiconductor Manufacturing(TSM)$ etc and assigned a “Sell” rating.
(5) UBS, Analyst, Timothy Arcuri :
On 17 Sep 2024, Timothy has a “Hold” rating on Intel and commented that Intel’s innovations in chip design and manufacturing are crucial for maintaining its leadership in the industry, though execution remains a key challenge.
In Summary.
Based on all the above, I think it is safe to summarize as such:
Intel is currently facing significant headwinds.
The company is focusing on (1) cost-cutting measures and strategic adjustments to improve profitability while(2) addressing supply chain issues.
In the near term, Intel’s performance will likely depend on its ability to (a) manage costs, (b) integrate new technologies, and (c) stabilize its core businesses.
Investors remain cautious but hopeful for a turnaround.
Wall Street is sitting on the fence, waiting for signs to show that Intel has turned the corner.
Will you be sitting on the fence too until the coast is clear OR will you dollar cost average on this former chipmaker titan ?
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