It’s been a tough year for Inter. (NASDAQ:INTC). The company’s stock price has essentially halved since January 1, and it was removed from the Dow Jones Industrial Average in November. To add insult to injury, Nvidia, the company Intel tried to acquire in 2005, has grown to become the world’s second-largest company (by market capitalization), replacing it in the Dow Jones Industrial Average.
But a new year is just around the corner, and with it comes the possibility of change. Is Intel ready to bounce back in 2025?
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A look at Intel’s third-quarter numbers shows why the stock is struggling. The company’s revenue declined 6% year-over-year, while its adjusted earnings per share (EPS) was $0.41 last year, compared to a loss of $0.46 this year. The semiconductor company’s biggest challenge is its third-party foundry business, which it launched in 2021 to boost growth. Rather, losses are piling up.
Foundry sales in the third quarter fell 8% from a year ago to $4.4 billion, and the segment’s operating loss widened to $5.8 billion from $1.8 billion a year earlier. This result included an impairment charge of $3.1 billion. But even without the impairment, the loss would still have jumped to $2.7 billion.
Going forward, the company is working to turn its foundry business into an independent subsidiary, which it believes will improve its service to customers and enable it to raise external financing. This could also be a precursor to the company eventually considering a spinoff.
Intel expects its foundry operating loss to improve next year as it moves to a new node with an improved cost structure and realizes cost savings from its restructuring plan. However, the New York Times reports that the Biden administration will cut the $8.5 billion in CHIPs Act subsidies the company was supposed to receive, while giving rival Taiwan Semiconductor Manufacturing a $6.6 billion subsidy to build the foundry. The bad news for the company came when it reported that it was considering granting it. It was revealed on Tuesday that Intel will actually receive $7.86 billion. This amount was slightly lower than the $3.3 billion Intel already received through a Department of Defense contract funded by the CHIPs Act.
Outside of the foundry business, Intel’s other businesses are mixed. On the positive side, the data center and artificial intelligence (AI) division performed well last quarter, with revenue up 9% year over year to $3.3 billion. This is significantly lower than the growth rate of most companies in the data center space, and the company said the Gaudi 3 AI accelerator will not meet its 2024 revenue goals.
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Meanwhile, the Client Computing Group performed well in the first half of this year with revenue up 31% in the first quarter and 9% in the second quarter, followed by a 7% revenue decline in the third quarter. I did. But going forward, the company is looking for Intel Core Ultra 200V series processors, formerly known as Lunar Lake, to drive its AI PC business, while the new Arrow Lake will drive desktop revenue growth. The company plans to launch its first central processing unit (CPU) based on its new 18A technology “Panther Lake” in the second half of next year.
Intel’s other businesses are also struggling. Subsidiary Altera’s sales fell 44% year-on-year, but rose 14% quarter-over-quarter, resulting in a modest operating profit. The company is considering spinning off its business into a separate company through an initial public offering (IPO) in the future.
Meanwhile, sales at subsidiary Mobileye, which makes self-driving chips, fell 8%. So far, the acquisition of both companies has proven to be a mistake.
Image source: Getty Images.
Intel appears to be heading down the path of a breakup, which could be a good thing for investors.
The company’s core product business, while not setting the world on fire, is solid. The business is on pace to generate about $12.6 billion in operating income this year, which translates to about $2.20 in earnings per share. (This assumes a 25% tax rate and 4.3 billion shares.) A 10x to 12x forward price-earnings (P/E) ratio for just the core business would equate to a stock price of $22 to $26.
Although the foundry business is struggling, Intel has real physical assets. The company has $104 billion in physical assets on its balance sheet and has spent approximately $68.5 billion in capital expenditures (capital expenditures) since the end of 2021, most of which has been devoted to this business segment. Using capital expenditure numbers alone, we can evaluate Intel’s foundry business by considering how much Intel spends on foundry assets.
However, the company has about $26 billion in net debt, which it can allocate to this business as well. That would value the foundry business, minus debt, at about $10 per share.
Meanwhile, nearly 88% of Mobileye’s stock is worth about $12.8 billion, or about $3 per Intel share. The company’s Altera business also has some value.
The divided Intel could be worth a total of $35 to $40 per share, which would be a significant increase from current levels. The company appears to be taking steps to spin off parts of its business, and Intel appears to be well-valued at current levels, with the stock expected to recover in 2025.
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Jeffrey Seiler has no position in any stocks mentioned. The Motley Fool has positions in and recommends Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Mobileye Global and recommends the following options: February 2025 $27 short calls on Intel. The Motley Fool has a disclosure policy.
Can you buy Intel stock now? Originally published by The Motley Fool
