Intel Crashed 30%. Is the Stock a Sell or a Bad-News Buy?
Intel‘s (NASDAQ: INTC) CEO Pat Gelsinger said he was disappointed by the chipmaker’s second-quarter results — and he wasn’t the only one. The market sanctioned the company’s performance, bringing the stock down 30% in one trading session last week. In the earnings report, Intel fell short of analysts’ expectations, predicted a weak period ahead, and announced a $10 billion cost-cutting plan that includes major job cuts.
This comes as the company, which had fallen behind in the artificial intelligence (AI) race, aims to gain share there, become a giant in the AI personal computer (PC) industry, and work toward its goal of becoming the world’s No. 2 chip foundry by the end of the decade.
Now, your question might be whether Intel’s latest news is a warning sign for investors or simply a painful but necessary period to go through to reach growth down the road. Let’s find out — and see if this stock is a sell or a bad-news buy.
A CPU giant
First a little background. Nvidia focused heavily on AI early in the game, and this has led to the company dominating the AI chip market, with an 80% share. But Intel, a giant in the market for central processing units (CPUs) — the main chip in any given computer — has struggled to keep up in the high-growth area of AI. So, while Nvidia’s annual revenue has soared in recent times, Intel’s has been on the decline.
Intel aims to turn things around with a reinvigorated focus on AI, recently introducing several new products, and a goal of leadership in the area of PCs meant for you and me that are fully equipped for AI tasks. The company also has opened up its foundry business to others, and as mentioned, aims to become a leader in this area within a few years.
But this transition to growth won’t happen overnight, and the company will have to travel across some bumps along the road. In the second-quarter report, Intel reported a 1% decline in revenue to $12.8 billion and adjusted earnings per share of $0.02 — both of these missing analysts’ estimates.
The company said this performance was due to its own decision to more quickly ramp up its Core Ultra AI CPUs and other moves to better position itself for the future. For example, the chipmaker transferred production of its Intel 4 and 3 wafers from Oregon to its high-volume facility in Ireland. Here, the costs are higher in the near term — weighing on earnings — but the move will improve gross margin over the long term as the company scales up.
Intel also says that with most of its wafer volume coming from its older process nodes, which are less cost and power efficient, the company expects operating losses to continue at the same rate into the third quarter.
Intel’s cost reduction plan
Lastly, Intel, as part of its path to recovery and growth, has launched a $10 billion cost reduction plan, with the company slashing its workforce by 15% and suspending its dividend as of the fourth quarter.
Now, let’s get back to our question: Is the stock a sell or a bad-news buy? Is the latest news a warning or a necessary step that will lead to growth?
First, it’s important to say that a drop in the stock price isn’t surprising. Intel gave investors a lot of bad news to swallow in just one report. And it’s clear the next couple of years could represent a pretty bumpy road for Intel as it reorganizes its cost structure, ramps up spending in certain areas and manages the impact of that on earnings, and attempts to meet its goals.
Still, accepting disappointing earnings in the near term could lead to a big win down the road. The AI personal computer, just to mention one area of Intel’s investment focus, represents less than 10% of the market now but is forecast to grow to more than 50% in 2026.
Intel’s foundry forecast
On top of that, as Intel shifts wafer production to newer processes, the company should see cost pressure on margins ease. And Intel maintains its forecast for the foundry business to break even in 2027.
So, there are many moving parts that Intel hopes will come together later this decade. And if they do, the company could see growth take off, and the share price might follow.
Considering all of these points, Intel’s latest news represents a tough but necessary period to go through so that the company can meet its goals. Times like these come with a decent amount of risk, so the stock isn’t the best choice for a cautious investor right now. It could stagnate or fall even more with any new disappointment.
That said, I wouldn’t sell the shares unless I needed the cash for other purposes — over time, Intel could win this new bet on growth.
And if you’re an aggressive investor, you might even consider picking up a few shares of Intel with the idea of holding on for at least five years — if Intel meets its goals, you won’t regret getting in early on this recovery story.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
Intel Crashed 30%. Is the Stock a Sell or a Bad-News Buy? was originally published by The Motley Fool
