Intel Corporation (INTC), a stalwart in the semiconductor industry, just reported a challenging second quarter, leading to a series of price target cuts and downgrades from analysts and casting a shadow over its stock performance. The company’s recent earnings report revealed significant hurdles, including a decline in revenue, job cuts, and the suspension of its dividend. These developments have sparked concerns among investors and analysts alike, prompting a closer examination of Intel’s future trajectory.

With the broader semiconductor industry experiencing growth, Intel’s difficulties stand out starkly, raising questions about its future performance and strategic direction. This article delves into the factors contributing to Intel’s current predicament, evaluates its financials, valuation, growth prospects, analyst expectations, as well as sentiment in the options market, and explores the potential trajectory of its stock price in the aftermath of recent developments.

About Intel Stock

Intel Corporation (INTC), based in Santa Clara, California, is a notable player in the global semiconductor industry, boasting a market capitalization of $80.84 billion. The company specializes in designing and manufacturing a wide range of computing and related products, including microprocessors, chipsets, and advanced driver assistance systems for autonomous vehicles.

Shares of Intel Corporation have plummeted by 62.2% on a year-to-date basis, significantly underperforming the broader market.

Intel’s Shares Plummet on Disappointing Q2 Results, Q3 Outlook

On Aug. 1, the semiconductor giant reported weaker-than-expected Q2 results, offered below-consensus Q3 guidance, and said it would cut over 15% of its workforce as well as suspend its dividend. As a result, shares of Intel crashed over -26% in the subsequent trading session. 

In Q2, Intel posted total revenue of $12.8 billion, a decrease of about 1% year-over-year, falling short of estimates by $150 million. Revenue from Intel’s Products business unit increased by 4% year-over-year to $11.8 billion, with 9% growth in client computing offsetting low single-digit declines in the data center and network operating segments. It’s worth noting that while competitors such as Advanced Micro Devices (AMD) and Nvidia (NVDA) are experiencing significant growth in the data center segment, Intel is currently unable to expand that business. 

Revenue from Intel Foundry rose 4% year-over-year to $4.3 billion, fueled by increased wafer volume mainly from Intel 3, Intel 4, and Intel 7 products. This increase was partially offset by lower intersegment average selling prices and higher intersegment credits. Total all other revenue decreased by 32% year-over-year to $968 million. Note that $4.3 billion of sales were reduced by “intersegment eliminations,” resulting in the net total being adjusted to the $12.8 billion figure.

As revenue fell compared to the same period last year, non-GAAP gross margin also dropped by 1.1 percentage points to 38.7% for the quarter, significantly below the company’s guidance of 43.5%. That margin is comparatively low for the industry. With operating expenses rising by approximately 5%, the company’s adjusted operating margin was only 0.2%, a decrease from 3.5% the previous year. Consequently, non-GAAP earnings per share plummeted from $0.13 to $0.02, falling short of Wall Street estimates by $0.08.

Even more concerning was that the revenue guidance for Q3 is essentially flat on a sequential basis, despite expectations for a seasonally strong quarter. Intel management projected revenues between $12.5 billion and $13.5 billion, marking a significant drop from the same period last year. Analysts had anticipated sales to grow to $14.39 billion. Adjusted gross margin guidance was set at a dismal 38%. As a result, the company forecasted a 3-cent per share loss even on a non-GAAP basis, in contrast to Wall Street’s expectations of a $0.32 profit per share.

Management cited several factors for the reduced margins in Q3, such as an unfavorable product mix, penalties from underutilization, higher-than-usual charges from non-core businesses, and more competitive pricing than anticipated. It seems that the primary cause of the shortfall is the product mix. 

The issue for Intel is that the product mix challenge will largely persist - and likely worsen - with the launch of its Lunar Lake CPU in late Q3. Intel is confident in the strength of its Lunar Lake product, highlighting that it will power over 80 new Copilot+ PCs from more than 20 OEMs. However, this falls short when compared to the “100+ design wins” that Advanced Micro Devices claims for its Zen 5 laptop CPUs. The limited adoption of Lunar Lake is likely influenced by the timing of the chip’s release. Given that Lunar Lake is projected to be a significant seller throughout the second half of 2024 and much of 2025, margins are expected to remain under pressure even with favorable yields. Consequently, Intel has postponed its target of achieving 60% margins until 2026.

Considering the challenges with Lunar Lake’s margins, management is pinning its hopes on the new products that the company plans to introduce with its 18A process starting in the second half of 2025. Management stated that the 18A process is performing well, and that Panther Lake and Clearwater Forest products have already been successfully initiated using this new process. Intel anticipates significantly better margins with Panther Lake, since the product will utilize Intel 18A chipsets rather than chipsets from TSMC N3 or N2. However, any advantages from the 18A process and the new Panther Lake and Clearwater Forest products will not materialize until 2026.

In light of the challenges with margins and revenues, combined with huge capital expenditures and $48 billion in debt on the balance sheet, Intel was compelled to implement aggressive cost-cutting measures. The company said it would reduce its 110,000-strong workforce by 15%. Intel also announced plans to reduce its investment in new plants and equipment by more than 20% in 2024, with anticipated spending now set between $25 billion and $27 billion. Lastly, the company said it would suspend its dividend beginning in the fourth quarter as it aims to prioritize liquidity to facilitate its transition.

“By implementing our spending reductions, we are taking proactive steps to improve our profits and strengthen our balance sheet,” said David Zinsner, Intel CFO. “We expect these actions to meaningfully improve liquidity and reduce our debt balance while enabling us to make the right investments to drive long-term value for shareholders.”

Due to these measures, the company anticipates significant reductions in both operating expenses and capital expenditures. Unfortunately for Intel investors, there is concern that even the cost-cutting measures may not be enough.

Intel’s Q2 Results Draw Sharp Reactions from Analysts

After earnings, Raymond James downgraded Intel to “Market Perform” from “Outperform.” Raymond James analysts noted that although management is optimistic about long-term targets, they anticipate that gross margin challenges will persist through 2025, with limited opportunities for near-term revenue growth. Consequently, analysts anticipate that profitability will continue to face pressure.

BofA downgraded Intel to “Underperform” from “Neutral” with a $23 price target, down from $35. BofA analysts said that profitability challenges are likely to continue through 2026, leading the firm to reduce its pro-forma EPS estimates for the calendar years 2024, 2025, and 2026 by 75%, 44%, and 29%, respectively.

Benchmark downgraded Intel to “Hold” from “Buy,” with no price target. “Given [Intel’s] much softer than expected outlook, we are left with continued market share loss to AMD in both the Data Center and Client Computing markets as the most likely culprit,” wrote Benchmark analyst Cody Acree in a research note.

New Street downgraded Intel to “Neutral” from “Buy” with a $27 price target. The analyst noted that revenues and gross margins are being “reset for the foreseeable future at levels incompatible with the outlook given over recent months" and viewed the extent of the company’s new restructuring plan as “putting at risk Intel’s ability to compete.” The firm, which no longer sees substantial evidence that Intel can achieve a turnaround in manufacturing and servers, argued that “the risk-reward of owning the stock has become unattractive.”

HSBC downgraded Intel to “Reduce” from “Hold” with a $19.80 price target, while Goldman Sachs analyst Toshiya Hari lowered the firm’s price target on Intel to $22 from $29 and kept a “Sell” rating on the shares following the Q2 report. A slew of other brokerages also lowered their price targets on Intel, including Wells Fargo, JPMorgan, Morgan Stanley, Barclays, Deutsche Bank, UBS, Truist, and TD Cowen.

Intel stock has a consensus “Hold” rating overall. Out of the 34 analysts covering the stock, two recommend a “Strong Buy,” one suggests a “Moderate Buy,” 27 advise “Hold,” one recommends a “Moderate Sell,” and the remaining three analysts have a “Strong Sell” rating. The average analyst price target of $31.76 indicates a potential upside of about 67.2% from current price levels.

INTC Stock Valuation and Analysts' Estimates

The post-earnings crash has positioned Intel shares at a valuation that presents them as a depressed asset relative to its semiconductor peers. INTC is currently trading at 11.22 times forward EV/EBITDA, which is below the sector median of 13.51x, but still higher than its five-year average of 9.49x. By contrast, AMD and NVDA are trading at multiples of 35.94x and 32.87x, respectively. 

Additionally, the stock’s forward price-to-sales ratio is 1.62x, which falls below the sector median of 2.71x and its five-year average of 2.84x. Again, AMD and NVDA are trading at multiples of 8.22x and 21.25x, respectively.

Analysts tracking Intel Corporation forecast an annual loss of $0.39 per share for fiscal 2024, reversing last year's profit. Additionally, Wall Street analysts expect Intel’s revenue to drop 3.20% year-over-year to $52.49 billion in FY2024.

Considering the challenging recovery Intel is expected to face over the next year or two, the company's shares are likely to remain undervalued until signs of growth reappear.

Options Market Sentiment on Intel Stock 

Examining the September 20, 2024, option chain, there is a bid/ask spread of $1.33/$1.36 for the $19.00 CALL option and $1.19/$1.22 for the $19.00 PUT option. Keep in mind that this is the options strike closest to the current stock price. We can gauge the expected price movement by using the midpoint prices of these options:

1.21 (19.00 put) + 1.35 (19.00 call) = 2.56/18.99 = 13.4%

Based on current prices, the options market suggests that INTC stock could potentially rise or fall by approximately 13% by the September options expiration from the $19.00 strike price, using the long straddle strategy. That would place the stock in a trading range of about $16.44 to $21.53. 

Additionally, there are about 7 times more open puts than open calls at the $19.00 strike price, with 3,513 open puts compared to 500 open calls. This reflects a pronounced bearish sentiment in the options market and implies a greater probability of the stock declining.

The Bottom Line on INTC Stock

Despite the recent post-earnings sell-off, I expect INTC shares to continue declining as the company’s performance deteriorates rapidly during a period of significant growth in the broader semiconductor sector, highlighting major execution failures at Intel. While Intel has the potential for a turnaround, it remains a distant and uncertain possibility in the years to come. Lastly, the sentiment in the options market suggests that the stock is likely to remain under pressure in the near term.