Intel (INTC, Financial) has recently been unfavorable among technology investors, primarily due to its poor results in the second quarter. Management has outlined a significant cost reduction plan in light of this, but past notions that it may leapfrog Taiwan Semiconductor Manufacturing Company (TSM, Financial)—also known as 'TSMC'—in manufacturing capability are no longer viable. Despite this, the stock is selling significantly cheaper than historically, and with Intel likely to deliver strong growth in FY25, I think this is a viable time to buy based on value. In the next 12 months, I see a market cap increase of approximately 50% as likely for the company. However, the longer-term returns seem less promising to me, given how the competitive market in chip design and manufacturing is developing.

Operational analysis

Firstly, readers need to place Intel’s recent 50% stock price decline into context. The company reported weaker-than-expected earnings for the second quarter, falling short of the GAAP EPS consensus estimate by $0.27 and missing the revenue consensus estimate by $147.82 million. At the time of the report, management announced a $10 billion cost-reduction plan, including cutting 15,000 jobs and suspending dividend payments. This is likely to significantly improve its prospects in 2025, especially as the company exits its peak capital expenditure cycle. Nevertheless, amid these challenges, Qualcomm (QCOM) has suggested it may seek to buy segments of Intel. Currently, Intel is lagging behind its major competitors in data center and AI chips—AMD (AMD, Financial) and NVIDIA (NVDA, Financial)—and is also failing to leapfrog TSMC in semiconductor manufacturing, which was its initial intention with its 18A advanced semiconductor manufacturing node. Now, TSMC has its market-leading 2nm N2 technology in the pipeline, with volume production expected in 2025.

With all of this context in mind, it’s clear why Intel’s stock has been performing so poorly recently. However, there are positive developments that fortify the company’s position at its currently depressed valuation. For example, Apollo Global Management (APO) has proposed a $5 billion investment in Intel, signaling confidence in its turnaround strategy. Furthermore, this year’s challenges are likely temporary; my independent perspective is that 2025 will be a much stronger year for the company. While the 18A node may no longer be leapfrogging TSMC, it is expected to launch in 2025, helping Intel regain a competitive position in semiconductor manufacturing. The growth generated from 18A will be significantly supported by the company beginning to capitalize on its in-house manufacturing capabilities.

Moreover, Intel’s IDM 2.0 initiative was implemented to enhance its foundry services. The company has heavily invested in fabs in the U.S., Europe, and Malaysia, including a $20 billion investment in two new fabs in Arizona. This is strengthening its global supply chain and increasing its manufacturing capacity. This explains why the company has had such a significant contraction in its free cash flow recently. While there have been challenges thus far in achieving a successful return on investment, as indicated in its second-quarter earnings report, I believe the company is still well-positioned based on a medium- to long-term horizon.

It’s worth reminding ourselves of management’s long-term strategy here, which reveals why the current depressed stock price could be a value opportunity. With an expansive internal foundry network, the company will have an increased capability to produce the majority of its products in-house. Furthermore, over time, it is likely to become a major provider of foundry services to external customers, including providing advanced process design kits for nodes like 18A.

However, none of this changes that TSMC’s moat and market position are still unbeatable—the company currently holds over 60% of the market share in the global semiconductor foundry market. Its market share is therefore several times higher than that of its nearest competitor, Samsung (SSNLF, Financial) Foundry, which has a market share of approximately 10 to 11%. Intel’s current position is negligible in comparison to these two players. Therefore, investors should not expect high alpha from Intel’s foundry services alone.

Valuation and financial analysis

Given the real constraints on Intel’s ability to produce lasting high growth in any of its major operating segments due to competition, I believe the value opportunity inherent in the low stock price is currently more appealing as a near-term allocation than a long-term one. The company has been particularly weak in profitability in the last few years, given the extensive operational investments it has been making to support its competitive positioning. Furthermore, its EV-to-revenue ratio has contracted less than its price-to-sales ratio over the past five years, suggesting that the company's net debt position has worsened relative to its market cap. That being said, there is enough total contraction on a revenue and book value basis to support a short-term investment. This is further supported by the fact that in 2025, I estimate the company’s year-over-year earnings growth could be over 300%, given its volume production plans with 18A, exit from its high-investment phase, and in-house manufacturing capabilities reducing costs.

On a revenue basis—which I believe is more apt for this investment due to its recent instability in profitability—the company could achieve total revenues of $55.5 billion for full-year FY25, based on my analysis. If its P/S ratio expands to 2.75 over the next 12 months and the market prices these sales into the stock a couple of months early, the company could have a market cap of $152.6 billion. This indicates the potential for a market cap increase of 52% in a year from the current market cap of $100.31 billion.

The company’s 10-year median P/S ratio is 2.94, and its 10-year revenue growth rate is 4.7%. Therefore, I believe an expansion to a P/S ratio of 2.75 is more than reasonable—even given the negative sentiment at the moment—considering my estimate of 6% revenue growth in FY25. This is further supported by the consensus that FY25 is likely to be a strong year for Intel on an earnings basis, as I mentioned above. While the market has a valid reason to be skeptical about Intel, I also find it highly unlikely that sentiment will not improve as the company's fundamental growth rates begin to expand.

Looking longer term, and given the cyclicality of the semiconductor industry, I don’t think we can expect 6% revenue growth to last. Certainly, 300% or more normalized earnings growth will be a one-off occurrence for FY25. Revenue growth is likely to taper for Intel after a successful ramp-up of its 18A node and the increased demand related to AI at the moment. Moreover, FY25 is likely to be strong because Intel’s upcoming products, such as the Panther Lake and Clearwater Forest chips, are set to leverage the 18A process node, offering improved performance for AI and high-demand applications.

In FY26, I expect we could see revenue growth of 5.5% or lower, and in 2027 and beyond, I believe the company will likely achieve a revenue growth rate of approximately 5%. Given that competition from TSMC is so strong, the notion that Intel will be able to maintain a 7% or 8% revenue growth rate over multiple years seems unlikely to me, especially considering the current operational challenges the company has faced in streamlining and efficiency, impacting its profitability.

Profitability

When looking more closely at Intel’s prospects of generating stable profits, there are certainly concerns currently that ought to be understood when making an allocation. The company’s net margin has declined from over 25% in 2021 to just 1.8% in the recent trailing 12 months. Moreover, this is higher than its operating margin of 0.92% right now, likely a result of tax credits from the CHIPS Act.

While the company’s current financial position is concerning, management has prepared for a robust 2025, reinforcing my near-term value thesis. For example, the company plans to deliver over 100 million AI PCs by the end of 2025. The company’s internal foundry model is also expected to deliver savings of $8-10 billion by the end of 2025—this involves Intel’s internal product groups operating in a foundry-style relationship with its manufacturing group. That being said, its foundry business is not expected to generate substantial revenue until 2027, with some revenue anticipated in 2026. This means that its foundry model won't lead to significant growth in the near term, but it is likely to aid in lowering the cost of production for its in-house chips, supporting my near-term value thesis. Intel is targeting significant margin expansion by 2030 through its foundry model and operational improvements, so long-term investors may be rewarded by buying the stock at its current depressed valuation.

Currently, Intel looks a little stronger when analyzing it based on EBITDA rather than net or operating income. It currently has $10.08 billion in depreciation and amortization, taking its trailing 12-month EBIT of $1.036 billion to $11.116 billion in EBITDA—that puts its current EBITDA margin at 20.17%. With lower capital expenditures on the horizon after its new fabrication facilities are complete, these should bring down its cost of goods sold, supporting its free cash flow, net income, and EBITDA. That said, I reiterate that there is significant execution risk in this thesis, and if management fails to effectively bring its foundry model to market, I expect further hardship and compounding losses could occur over the long term.

Risk analysis

Between 2021 and 2025, Intel planned to achieve five processor nodes—Intel 7 and Intel 4 are already in use, Intel 3 is ready for high-volume manufacturing, and Intel 20A is set to debut with Arrow Lake processors, serving as a precursor to the more refined 18A node. Therefore, management is broadly on track, but any challenges in 2025 for full-scale production of 18A could significantly reduce the likelihood of my value thesis being successful.

Compounding recent setbacks, Intel recently announced delays in the construction of two major chip-making factories in Germany and Poland, pushing back their completion by approximately two years due to lower-than-expected demand and financial challenges. Additionally, with the $10 billion cost-saving plan outlined in my operational analysis and the reduction of 15,000 positions in its workforce, the financial strain could lead to lower revenues, even if future profitability becomes more secure.

Given the rapid advancements in the semiconductor industry led in manufacturing by the highly organized TSMC, any operational setbacks could further exacerbate Intel’s lag behind the leading semiconductor players. This also applies to chip design compared to market leaders AMD and NVIDIA. In the near term, operational failures, lower demand, and technology inadequacies could lead to Intel being a value trap. In the long term, significantly lagging behind its competitors seems a very real and likely outcome. Therefore, these risks should be taken seriously, and allocations should not be outsized, given the potential for future growth inhibitions.

Conclusion

I’m confident Intel is currently a strong value opportunity, given that FY25 is likely to be a strong year for the company. With my estimate of 6% revenue growth from the full-year 2024 consensus total revenue and my prediction of a moderate expansion in its P/S ratio, the company’s market cap could increase by approximately 50% in a year.

However, looking longer term, I believe the competitive pressures from TSMC in manufacturing and AMD and NVIDIA in design will continue to be problematic. Therefore, this value thesis may work better in the near term than over five to 10 years, depending on management’s strategic decisions and execution.