Will Intel Stock Rebound In The Next Year?

Summary:

• Intel is guiding for positive QoQ top line growth for the remaining quarters of 2023, and it is also sticking to its $3 billion expense savings target for this year.
• In Q1 2023, INTC gained share in the x86 server CPU and the x86 notebook CPU markets as per data from Mercury Research.
• I still rate Intel’s shares as a Buy, as I see its stock price rebounding in the year ahead.

Elevator Pitch

I continue to award a Buy investment rating to Intel Corporation’s (NASDAQ:INTC) stock.

With my earlier update for INTC written in March, I detailed the key takeaways from Intel’s Data Center and AI Investor Conference. I touch on the prospects of a potential rebound in INTC’s share price in this latest article.

My analysis leads me to the conclusion that Intel’s shares can rise in the coming year, taking into account INTC’s favorable top line guidance, its recent market share gains in specific segments, and its current valuations. Therefore, I have made the decision to keep my Buy rating for Intel unchanged.

Why Did Intel Stock Drop Within The Past Year?

In the past year, INTC’s shares have fallen by -29.9%. As a comparison, the S&P 500 rose by +7.0% during the same time period.

Intel’s poor share price performance for the last one year is attributable to the company’s below-expectations bottom line and dividend cut. The company’s FY 2022 earnings per share or EPS fell short of the analysts’ expectations, and this was the first time in four years that INTC had suffered from an earnings miss based on full-year results. Intel also registered net losses (on a GAAP basis) for two consecutive quarters in Q4 2022 and Q1 2023, respectively. To make things worse, INTC announced in February that the company will reduce its quarterly dividend per share by -66% from $0.365 previously to $0.125 going forward.

Semiconductor companies in general have been negatively impacted by weak demand as a result of the unfavorable macroeconomic environment, and Intel was no exception. For the company specifically, INTC has been losing market share to its competitors like AMD (AMD) in recent years. These negative industry- and company-specific factors explain why Intel’s financial and share price performance have disappointed the market.

Why Has INTC Gone Up This Year?

In contrast with its share price underperformance in the last one year, Intel has delivered positive stock price returns and beat the broader market in the current year thus far. In 2023 year-to-date, INTC’s share price was up by +11.0% which was better than the S&P 500’s +9.8% rise in the same time frame. Specifically, Intel saw its stock price go up by +2.8% and +4.0% on April 27, 2023 and April 28, 2023, respectively which coincided with the timing of the company’s Q1 2023 results announcement.

There were two key positive read-throughs from INTC’s first quarter financial results release which drove up Intel’s share price.

Firstly, Intel had guided in its Q1 2023 results presentation that the company’s revenue is expected to increase by +2.4% QoQ from $11,715 million in the first quarter of this year to $12 billion for the second quarter. This will represent a significant turnaround for INTC, considering that the company had recorded two consecutive quarters of QoQ top line contraction in Q1 2023 and Q4 2022. At its Q1 2023 results call, Intel stressed that it is “seeing green shoots and expects sequential revenue growth throughout the year.” This implies that INTC’s revenue is likely to have already bottomed out in the first quarter of the current year.

Secondly, INTC has made decent progress with its expense optimization efforts, which makes it more likely for the company to meet its full-year and medium-term targets. As indicated in its 10-Q filing, Intel’s operating costs decreased by -11% YoY to $5.4 billion in Q1 2023. INTC disclosed at its first quarter results briefing that “exited our server business” and worked on “integrating AXG (Accelerated Computing Group) into DCAI (Data Center And AI Group) and CCG (Client Computing Group)” recently as part of its cost optimization plans. As such, it is reasonable to assume that Intel remains on track in achieving $3 billion of expense reductions this year and $8-$10 billion of yearly cost cuts by 2025.

In a nutshell, Intel’s financial outlook, in terms of both its top line and bottom line, has become more favorable based on an analysis of the company’s recent quarterly disclosures.

INTC Stock Key Metrics

I have a positive opinion of Intel’s recent market share metrics.

Goldman Sachs (GS) issued a report (not publicly available) titled “Mercury 1Q23 CPU Report” on May 9, 2023 citing the most recent quarterly CPU market share data compiled by Mercury Research.

According to the GS report, Intel’s share of the x86 server CPU market improved from 72.9% in Q4 2022 to 73.1% for Q1 2023, following an earlier +0.7 percentage points share gain between Q3 2022 and Q4 2022. Notably, INTC’s x86 server CPU market share had previously dropped from 96.0% for Q3 2019 to 72.2% for Q3 2022.

Separately, INTC achieved a +140 basis points share gain for the x86 notebook CPU market in Q1 2023 to grow its market share to 89.1%. Earlier,, Intel’s market share in the x86 notebook CPU segment decreased from 93.1% in the third quarter of 2019 to as low as 73.0% in Q2 2022.

At the Q1 earnings briefing, Intel outlined expectations for “our competitive position to continue to improve as we ramp Meteor Lake production in Q2 for a launch” in 2H 2023, and revealed that “Emerald Rapids, our fifth gen Xeon Scalable” is “on track to launch in Q4 ’23.”

Intel’s Product And Process Roadmaps

It is encouraging to see Intel turn around from prior market share losses and be well-positioned for share gains in the future considering its product and process roadmaps.

Is The Stock Price Projected To Continue Going Up?

In my view, I think that Intel’s stock price can continue to rise following its +11.0% share price increase since the beginning of this year.

As discussed in the preceding sections of this article, INTC’s outlook in terms of revenue growth, market share gains, and cost optimization is pretty good. As such, I have the confidence that Intel’s positive share price momentum (on a year-to-date basis) can be sustained.

Can The Share Price Rebound To $50 In A Year?

Intel’s shares last traded at $50 or higher in early 2022. While I don’t think INTC’s stock price can return to the $50 level in the next year, Intel’s potential upside is sufficient to justify a Buy rating.

My target price for Intel is $36.30 implying a +22% capital appreciation potential based on a five-year mean consensus forward next twelve months Enterprise Value-to-Revenue multiple of 3.2 times (source: S&P Capital IQ). As a comparison, the market currently values INTC at 2.7 times forward Enterprise Value-to-Revenue which is below its historical average.

Is INTC Stock A Buy, Sell, Or Hold?

INTC stock is deserving of a Buy rating. Intel’s financial outlook has improved, but the stock is trading below its historical mean Enterprise Value-to-Revenue valuation multiple. INTC’s financial outlook and valuations are misaligned, which throws up a buying opportunity for the stock.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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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