Intel: Buy The Dip After Earnings, Tailwinds Expected In 2024
Contributor since 2021 / 2870 Followers
Summary:
- Intel’s stock decline presents a buying opportunity for investors due to strong long-term potential and successful execution of growth strategies.
- Positive Q4 results and management’s commitment to their aggressive timeline for future growth indicate a promising future for Intel.
- The semiconductor industry is expected to recover in 2024, providing a tailwind for Intel.
liorpt
Introduction
On December 7th, 2023, I had a bullish thesis on Intel (NASDAQ:INTC). At the time, I positively viewed Intel bringing Intel 4 products to market as promised, as it likely signaled that the company is starting to reap benefits from the 5 nodes in 4 years vision. I continue to stand by this argument, as Intel’s management team provided a further and more detailed guidance regarding this vision during the recent earnings report.
Intel stock, unfortunately, saw a sharp decline following the company’s 2023 Q4 earnings report, and I believe this creates a buying opportunity for long-term investors. Although the 2024Q1 guidance was slightly disappointing, which was the cause of the negative stock price reaction, Intel continues to demonstrate a strong long-term potential. The company has been aggressively and successfully executing on setting the foundation for future growth through its 5 nodes in 4 years vision, with the continued guidance hinting towards a continued successful execution. Further, while Intel’s fundamentals are quickly improving through innovation, the semiconductor industry, especially the client computing segment, is expected to recover in 2024 providing a meaningful tailwind for Intel. Numerous industry peers including Intel are guiding for this positive estimate. Therefore, I believe Intel is a buy.
Becoming Competitive
On January 25th, 2024, Intel reported 2023Q4 earnings. Revenue increased 10% year-over-year to $15.4 billion, which was $300 million above the initial outlook, and the gross margin increased 5 percentage points year-over-year to 48.8%, which was 2.3 percentage points higher than the initial outlook. As such, from the depth of low demand and intensive capital investments in 2022Q4, Intel’s EPS grew 260% year-over-year to $0.54. Overall, 2023Q4 results were positive.
While the company’s performance during the final quarter of 2023 reflected the current state of the business, the management team’s commentary revolving around the company’s 5 nodes in 4 years reflected the potential future of Intel.
During the earnings call, the management team said the “two lead vehicles in Intel 3 are on track, and we look forward to launching Sierra Forest in the first half ’24 followed shortly thereafter by Granite Rapids.” As was the case for Intel 4, the management team continues to deliver on their aggressive timeline. Beyond Intel 3, “Arrow Lake, [the company’s] lead Intel 20A vehicle will launch this year [as] Intel 18A is expected to achieve manufacturing readiness in second half ’24.”
The progress and the fact that the management team continues to deliver on their aggressive plans and promises, in my opinion, are significant as the continued execution of the company’s vision will allow Intel to become the only successful company to achieve both fabrication and fabless parts of semiconductor manufacturing. The potential is grand.
IFS, Intel Foundry Services, revenue grew 63% year-over-year to $291 million in the fourth quarter. While the growth rate, the result of Intel’s renewed focus on third-party foundry solutions, is strong, the absolute size of IFS is a drop in the ocean. TSMC (TSM), one of the biggest semiconductor foundry companies, has a quarterly revenue of
$19.62 billion (2023Q4), reflecting the sheer size of the industry. As such, given that Intel’s competitiveness improves in foundry services, the potential for Intel, even when capturing a fraction of the market, could be significant.
The management team, during the earnings call, said that the “IFS already has more than 50 test chips in the pipeline across 2024 and 2025 [where] 75% of which are on Intel 18A” before going on to say that the “lifetime deal value for IFS is now over $10 billion, more than doubling from the $4 billion we provided in our last update” showcasing the importance of achieving 5 nodes in 4 years to Intel’s future success in IFS.
Beyond foundry services, if Intel could regain leadership with its 18A product as the management claims, the company’s client and enterprise semiconductors could also benefit as other fabless companies like AMD (AMD) will have to rely on less advanced fabrication services.
Overall, Intel’s progress and the management team’s guidance toward achieving 5 nodes in 4 years is crucial to Intel’s future success, and Intel confirmed that the company is on track with this vision creating a strong growth potential for the company.
Industry Tailwind
Intel’s long-term potential does not end with the company’s improving fundamentals, likely, the semiconductor industry will also provide a meaningful tailwind in 2024.
During the 2023Q1 earnings call, Intel’s management team signaled that the consumer electronics demand slump along with the bloated customer inventory is ending allowing the company to expect positive growth in client-side semiconductors. The management team said they expect “the PC TAM [to be] up low single digits year-on-year in 2024.”
Intel is not alone in projecting an industry tailwind in 2024; numerous industry peers including TSMC and Samsung (OTCPK:SSNLF) have also guided for a positive tailwind.
During the 2023Q4 earnings call, TSMC’s management team said that the “business has bottomed out on a year-over-year basis and we expect 2024 to be a healthy growth year” also hinting towards a positive business environment going forward. Further, Samsung, during the 2023Q4 earnings report, said that the company “expect[s] the foundry market to return to 2022 levels thanks to the recoveries in smartphone and PC demand” along with the recovery in the memory business.
Along with Intel’s management team, the industry peers have also signaled for a potential tailwind going into 2024. As such, I believe it is reasonable to argue that Intel will likely benefit from the industry tailwind throughout 2024.
Risk to Thesis
While the rise in consumer electronics demand is expected to provide a tailwind, Intel’s data center and AI business, unlike AMD saw a declining revenue raising concerns about Intel’s competitiveness and market demand. During 2023Q4, Intel’s data center and AI group revenue declined by 10% while the network and edge growth revenue declined by 24% year-over-year. This has happened while AMD’s data center segment increased by 38% year-over-year and embedded segment revenue decreased by 24% year-over-year. Overall, Intel’s enterprise business has lagged behind that of AMD, raising a serious question regarding the competitive landscape potentially hindering Intel’s future growth.
While the risk is certainly concerning, posing a significant risk to my bullish thesis, I believe it could be unfair to Intel to simply compare the enterprise businesses’ growth levels. AMD, in the 2023Q4 earnings report, noted that the data center business growth was the result of a “strong growth in both AMD instinct GPUs and 4th GEN AMD EPYC CPU sales.” Intel does not have a competitive GPU product, and because artificial intelligence and machine learning require a far greater amount of GPU than a CPU, AMD could have benefited from the GPU segment while Intel could not, which could mean that Intel is not losing market share in the CPU market.
Intel’s management team supported this thesis during the earnings call by saying that the company’s market share was constant at the 2023Q3 levels. Therefore, although it may be too early to profoundly determine the magnitude of the risk, the disparity between Intel and AMD’s numbers could have simply resulted from the two companies being exposed to different market segments.
Summary
Intel stock declined sharply following the 2023 Q4 earnings report, creating an attractive buying opportunity for long-term investors. Not only are Intel’s fundamentals improving through continuous and successful execution in reaching the 5 nodes in 4 years vision, but industry recovery, and growth in 2024 are also expected to provide a meaningful tailwind for Intel’s business. Thus, I believe Intel is a buy.
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Analyst’s Disclosure: I/we have a beneficial long position in the shares of INTC, TSM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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