Intel (NASDAQ:INTC), once a dominant force in the semiconductor industry, is currently facing a tough period of challenges and uncertainties. Intel stock has plummeted nearly 60% year-to-date, drastically underperforming the S&P 500 Index’s (SPX) approximate 9% gain. Adding to the concerns, the company anticipates more difficulties in the second half of 2024, facing pressure on margins and increased competition.
Challenges Ahead for Intel
The ongoing issues raise concerns about Intel’s future viability and its position in the market. Compounding these challenges are broader macroeconomic uncertainties. In response, Intel has implemented cost-cutting measures in an attempt to stabilize its finances amidst declining market share and shrinking margins.
While these cost-cutting and growth initiatives are positive steps, doubts remain about Intel’s ability to meet its strategic goals, especially given the intense competition from Advanced Micro Devices (NASDAQ:AMD) in both the Client Computing Group (CCG) and Data Center and AI Group (DCAI) segments. This uncertainty makes it difficult to justify buying Intel stock at its current levels.
However, the significant drop in Intel’s stock price suggests that many of the negatives may already be priced in, making selling the stock at current levels potentially risky.
Intel is at a critical juncture and needs to take strong actions to regain investor trust. Here’s a closer look at the factors that suggest investors should approach with caution.
The Bull Case for Intel Stock
Despite a disappointing second quarter, Intel is stepping up efforts to improve profitability and capital efficiency, targeting over $10 billion in savings by 2025. The company aims to reaccelerate growth by focusing on the artificial intelligence (AI) PC category, which is expected to see significant growth in the coming years.
Additionally, Intel plans to launch its first client CPU on the Intel 18A process in the second half of 2025, promising enhanced performance and cost competitiveness. This new product could drive volumes and boost the company’s margins.
Intel’s cost-reduction plan could also be a key short-term catalyst. The company aims to cut operating expenses to approximately $20 billion in 2024 and further reduce them to $17.5 billion in 2025, representing more than a 20% decrease from its previous estimates. These actions include a significant reduction in headcount by the end of this year.
Moreover, Intel is focusing on strengthening its liquidity by suspending dividend payouts starting in the fourth quarter. This move will enable the company to support the investments needed to execute its turnaround strategy.
The Bear Case for Intel Stock
While Intel is taking measures to cut costs, fundamental issues such as increased competition and market share losses could continue to negatively impact its financials.
During the Q2 earnings call, management indicated that they would continue to invest in their growth strategy, even with reduced overall spending. However, Intel’s revised capital expenditure forecast for 2024 is between $25 billion and $27 billion, a significant reduction of over 20% from previous guidance. This cut could hinder Intel’s ability to maintain competitiveness and market share in its CCG and DCAI segments. The reduction in capex is also seen as a negative indicator, suggesting softer demand in the second half of the year.
While Intel’s management is confident that cost reductions will lead to sustainable earnings growth, execution risks and the pace of recovery remain concerns. Furthermore, new product launches in 2025 are expected to limit margin improvements and pressure earnings, primarily due to investments in the AI PC category. The company’s product mix will likely continue to be a headwind for margins in the coming quarters.
The Bottom Line on Intel Stock
As Intel navigates its current challenges, investors should approach with caution and avoid immediate optimism. Although the recent decline in stock price might suggest a potential value buying opportunity, the inherent risks associated with Intel’s uncertain path forward warrant a cautious stance. Moreover, the substantial drop in Intel’s stock price (approximately 30% over two trading days) makes shorting it equally risky.
As Intel focuses on initiatives to regain investor confidence and enhance its competitiveness, the path to recovery remains uncertain, as reflected by the cautious stance adopted by analysts. Among the 34 experts covering Intel, three recommend a “strong buy,” one suggests a “moderate buy,” 26 have a “hold,” one recommends a “moderate sell,” and three suggest a “strong sell,” reflecting an overall consensus rating of “hold.”
Given the significant decline in its price, Intel stock’s average price target of $39.45 indicates a potential upside of about 96.2% from current levels.
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