With New AI Processors, Will Intel Stock Return To Pre-Inflation Shock Highs Of $68?

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Intel stock (NASDAQ:INTC) currently trades at $31 per share, about 55% below the levels of almost $68 seen on April 9, 2021 (pre-inflation shock high).  Intel saw a demand pullback post the Covid-19 lockdowns, as the remote working and learning trend eased, resulting in lower demand for PCs and laptops. Moreover, the increasing prominence of graphics processors (GPUs) also appears to be threatening Intel as these chips – which are seen as core to artificial intelligence-related workloads – appear to be making Intel’s CPU sales less prominent in the AI era.   That said, Intel stock has recovered by about 20% from a low of $25 seen in October 2022. This has been driven by signs that the PC market could be picking up. Moreover, Intel is also taking some small steps to make its chips more competent in the AI era. The company is expected to get much more competitive with pricing for its new Gaudi 3 AI accelerator, indicating that it could deliver better value compared to rivals Nvidia and AMD. Intel also introduced its latest data center processor, Intel Xeon 6, as well as a new AI PC processor code-named Lunar Lake.

INTC stock has suffered a sharp decline of 40% from levels of $50 in early January 2021 to around $30 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. In comparison, Arista Networks (NYSE:ANET), a company that benefits from generative AI, has seen its stock surge by over 300% over the same period. Arista is a market leader in high-speed networks catering to hyper-scalers and big corporations that are major stakeholders in the generative AI trend. Turns out, Arista is part of the 30-stock Trefis High Quality (HQ) Portfolio, which has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Now, can Intel’s beaten-down stock outperform going forward?

Returning to the pre-inflation shock level would mean that Intel stock will have to gain about 120% from here. However, we estimate Intel’s valuation to be around $41 per share, about 35% ahead of the current market price. Intel has an opportunity in the foundry space, as it looks to produce chips for third-party vendors. However, the business is facing some challenges at the moment, due to Intel’s missteps which caused it to outsource a considerable amount of wafer production. It also remains to be seen how well Intel can fare in the AI space, given Nvidia’s early mover advantage and its software-related moat. Our detailed analysis of Intel’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

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2022 Inflation Shock

Timeline of Inflation Shock So Far:

  • 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to a high demand for goods; producers were unable to match up.
  • Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
  • April 2021: Inflation rates cross 4% and increase rapidly
  • Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
  • June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
  • July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
  • October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
  • Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, with a possibility of rate cuts in 2024.

In contrast, here’s how Intel’s stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Intel and S&P 500 Performance During 2007-08 Crisis

Intel stock declined from a little over $26 in September 2007 to just $12 as of March 2009 (as the markets bottomed out), implying INTC stock lost nearly 52% of its pre-crisis value. It recovered from the 2008 crisis to levels of around $20.40 in early 2010, rising roughly 60% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Intel Fundamentals Over Recent Years

Intel’s revenues rose from around $72 billion in 2019 to about $79 billion in 2021 led by surging demand for computing products through the early phase of the Covid-19 pandemic. However, sales declined considerably over 2022 to about $64 billion, as demand, particularly for the company’s client computing group, cooled off with PC sales moderating post-Covid-19 lockdowns. Sales fell further to just about $54 billion in 2023. Intel’s earnings also declined from around $4.77 per share in 2019 to $0.40 in 2023 due to the decline in sales.

Does Intel Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Intel’s total debt has increased from $29 billion in 2019 to $49 billion presently, while its total cash stood at about $28 billion. It also garnered about $15 billion in cash flows from operations in 2022. The company’s financial position is reasonably healthy, and it appears to be in a good position to meet its near-term obligations.

Conclusion

While Intel stock could benefit from easing inflation and the Fed’s recent indication that it could cut interest rates over the next year,  strong competition in the CPU market and the rising prominence of GPUs could limit the upside. 

Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 INTC Return 0% -39% -15%
 S&P 500 Return 1% 12% 138%
 Trefis Reinforced Value Portfolio 1% 5% 648%

[1] Returns as of 6/6/2024
[2] Cumulative total returns since the end of 2016

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