Multi-billion-dollar chipmaker Intel (NASDAQ:INTC) has faced a tumultuous 2024, with its stock falling by 60% as of September. This decline in Intel stock was fueled by a series of setbacks, including disappointing financial performance, recent manufacturing challenges, and significant uncertainty about the company’s future direction that necessitated a deep 28% discount to Intel stock’s book value. However, the steep drop has also created a compelling trading opportunity for contrarian and value stock investors.
Why is Intel stock struggling?
Intel’s revenue and earnings performance has disappointed over the past three years as sales dropped at an average annual rate of 10.8% while diluted earnings per share shrank at a compound annual rate of 63% over the short period. The business has performed badly historically, and concerned investors were hitting sell buttons.
Further, investors learnt during the first week of September that Intel’s wafers reportedly failed Broadcom’s ongoing tests, putting a potentially significant dent in Intel’s ambitions to become a preferred semiconductor manufacturing contractor in North America. Intel has invested billions into becoming a foundry operator on U.S. soil, and its latest 18A technology platform might have failed to impress a big-money client.
That said, Broadcom hasn’t ruled out working with Intel entirely.
Notably, media reports that Intel’s chief executive officer planned to pitch to the company’s board a proposal to sell some of the company’s assets to reduce costs, which increased uncertainty about the company’s future. Intel may sell assets, shrink its balance sheet, and reduce its productive capacity, but the plan may miss desired financial targets. That said, businesses sometimes undergo temporary setbacks; re-engineering and reorganizing are proven ways to extend corporate survival and initiate renewal.
Then, there were trading-related issues. Intel stock may be delisted from a prestigious DOW index. Demand for Intel stock may decline on the financial markets as institutional money managers with mandates to track the DOW offload the stock to buy something else that replaces INTC in the index constituents.
Should you buy the dip on Intel stock?
The decision to buy Intel stock right now should depend on the investor’s view on the factors leading to its current weakness as temporary and the confidence that the issues will resolve during one’s intended holding period, which should ideally be long term.
Intel is undertaking a multi-billion annual cost-reduction plan that may turn around its fortunes in the near future. It recently announced plans to shed 15% of its employees, it’s reducing its research and development (R&D) expenses, cutting operating expenses by up to US$4.5 billion in 2025, and targets reducing its annual cost of sales by another US$1 billion next year. Efforts at self-renewal may revive its earnings performance, preserve its balance sheet, and pay contrarian investors handsomely.
The company’s reengineered operating model could find an efficient sweet spot that propels the business to profitability growth and higher cash flow generation and usher it into new stock market glory over the next few years.
While it’s not yet clear if Intel has lost Broadcom’s potential business, the company has received 12 customer request proposals for the new foundry business. It doesn’t need to win all the interested customers for foundry operations to make meaningful contributions to its bottom line.
Looking ahead, any significant consumer uptake of artificial intelligence (AI) enhanced personal computers and refreshes as Windows 10 nears its end of life could breathe new life in PC sales and bring good business growth to Intel, while government funding from the U.S. CHIPS Act may enhance cash flow and help finance growth plans.
Meanwhile, Intel stock trades at a price-to-book value multiple of 0.7 which implies a significant discount to accounting estimates. Financial analysts predict a strong 40% compound annual growth rate in Intel’s earnings per share over the long term, and that may justify a forward price-to-earnings multiple of 53 attached to INTC stock today.
Foolish bottom line
Playing an Intel stock recovery profitably may require a long-term investment approach that allows for months of volatility ahead and gives room for temporary target misses as the company transforms its business for success. Risks still abound. However, Intel has a chance to re-discover itself, reform and revamp its processes, and have room to richly reward long-term-oriented investors over the next five years as reorganization plans materialize.
