Intel’s Rocky Road: Can New Innovations Propel Stock Recovery?

Intel (NASDAQ:INTC) shares have plummeted over 55% this year, trading around $21 each. The decline partly stems from Intel losing ground in the CPU market, where the focus is shifting toward AI-driven GPU chips for data centers. However, a more pressing concern for Intel lies within its foundry operations. Over the past two years, Intel has invested approximately $25 billion into this segment, yet it reported a sizable operating loss of $7 billion against $18.9 billion in revenue. Despite these challenges, we believe a turnaround is on the horizon. Intel’s upcoming 18A fabrication technology is nearing launch, and the company may benefit from increased regulatory support aimed at fostering U.S. technological independence.

A Look at the 18A Process Technology

Intel is pinning its hopes on the 18A process, its most advanced technology to date, to revive its foundry business. This new process incorporates innovative features like RibbonFET gate-all-around transistors and PowerVia backside power delivery, enhancing chip performance and power efficiency. Operating at a 1.8-nanometer node size, Intel claims its 18A process is ahead of TSMC’s 2 nm N2 process, expected in late 2025. Despite TSMC asserting better performance in areas like SRAM density, Intel’s 18A offers an advantage with reduced power loss and improved thermal management. Positive or negative news regarding the chip’s development could lead to stock fluctuations. For those seeking a steadier investment avenue, the High Quality portfolio has consistently outperformed the S&P 500, boasting over 91% returns since its inception.

In early August, Intel announced significant milestones for its 18A chips, confirming they had powered on and booted operating systems successfully. The company anticipates that external customers will begin to manufacture their first 18A designs in 2025, with mass production following shortly after. Notable clients include the U.S. Department of Defense, which is working with Intel on the RAMP-C program aimed at cultivating domestic semiconductor technology. Other major players like Amazon and Microsoft are also looking to develop custom chips, particularly for AI applications.

Recently, speculation arose about Broadcom’s dissatisfaction with the yields from Intel’s 18A process. However, Intel’s former CEO, Pat Gelsinger, dismissed these claims. Current figures indicate a defect density of 0.4 per square centimeter for Intel’s process—just above TSMC’s benchmarks of 0.33 defects on its older N7 and N5 nodes at a similar stage. Generally, a defect density below 0.5 is considered acceptable for development phases, placing Intel within industry standards for advanced nodes and capable of achieving usable yields.

Intel’s Growing Influence Amid Geopolitical Shifts

With Donald Trump’s focus on enhancing U.S. manufacturing, Intel could stand to gain from favorable policies designed to strengthen domestic chip production. There are possibilities for tariffs that could disadvantage foreign chip manufacturers, potentially increasing demand for Intel’s services. The geopolitical landscape has made semiconductors critical for national security, an area Intel is well-positioned to serve given its U.S. manufacturing capabilities. Recently, Intel secured a $3 billion contract to amplify chip production for the military—an opportunity that could expand further under the current administration’s priorities.

Intel’s significant fabrication capacity and advanced nodes offer domestic semiconductor designs more stability, especially when compared to companies like Nvidia, which relies heavily on Taiwan’s TSMC for chip production. As geopolitical tensions with China loom, Intel’s U.S.-based operations present a lower-risk alternative.

Over the past four years, Intel’s stock performance has been anything but stable; returns have fluctuated wildly, contrasting sharply with the performance of the S&P 500. INTC recorded gains of 6% in 2021, then fell by 47% in 2022, before rebounding with a remarkable 95% in 2023. Meanwhile, the Trefis High Quality (HQ) Portfolio has exhibited considerably less volatility and has outperformed the S&P 500 consistently during the same timeframe. Is Intel likely to underperform again in the coming year, or can it mount a recovery based on its recent advancements?

Examining Intel’s Valuation and Foundry Prospects

The foundry business is fraught with risk, necessitating significant capital investments influenced by projected future technologies. Although Intel has faced challenges in its current investment cycle, the stock is currently valued at under 1x its book value, indicating that the market reflects primarily on its tangible assets. This suggests that Intel’s advanced manufacturing expertise, contributions to national security, and future innovations are overlooked, creating an opportunity for savvy investors. Currently, Intel trades at approximately 21 times its anticipated 2025 earnings, which are hindered by high foundry costs and recent losses in market share. Earnings expectations sit around $1 per share for next year, down from close to $2 in 2022 and nearly $5 in 2021, but recovery in demand could signal an eventual rebound in both earnings and stock valuation.

The new co-CEOs of Intel have indicated that the foundry business is being positioned as a subsidiary, allowing it to function separately from the chip design segment. This separation could unlock additional value down the line. Currently, we estimate Intel’s stock value at around $27 per share, about 30% higher than its present market price. For a deeper dive into Intel’s valuation, refer to our analysis: Expensive or Cheap?

[1] Returns as of 12/13/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.