Cloud And AI Trends Will Drive Semiconductor Expansion

Key Takeaways

• Strategic shifts toward AI solutions and manufacturing leadership are aiming to capture digital growth trends and boost long-term revenue and margin recovery.
  
• Organizational streamlining and government incentives are expected to improve operational efficiency, capital allocation, and the company’s financial resilience.
  
• Lagging process node advancements, high investment needs, shifting customer preferences, and macroeconomic pressures threaten Intel’s competitiveness, margin profile, and ability to sustain long-term growth.

Catalysts

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• Intel is aggressively pivoting its product and engineering focus to address the proliferation of AI workloads, emphasizing best-in-class CPUs, GPUs, and full-stack AI solutions designed for data centers, edge, and enterprise applications; this strategic realignment positions Intel to capture surging demand from the ongoing wave of digitization and AI adoption, which is likely to deliver revenue acceleration and improve long-term earnings growth.
  
• The ramp and anticipated high-volume manufacturing of advanced process nodes such as Intel 18A, and the focus on regaining leadership in semiconductor manufacturing, are set to attract both internal and third-party foundry customers, increasing wafer volumes and potentially restoring gross margins as higher-margin proprietary products and external revenue streams come online.
  
• Efforts to streamline the organization by flattening management layers, removing bureaucracy, and accelerating decision-making are expected to significantly lower operating expenses, targeting a reduction in OpEx to $17 billion in 2025 and $16 billion in 2026, resulting in improved operating leverage, higher net margins, and enhanced free cash flow over the medium
• and long-term.
  
• Strengthening the data center and edge product portfolios, including advancements with products like Panther Lake and Clearwater Forest and the expansion of AI-enabled server CPUs, positions Intel to benefit from the broad trend of cloud migration, increased global connectivity, and the need for high-performance computing, supporting both top-line growth and improved average selling prices.
  
• Government incentives for domestic chip production and the strategic decision to optimize capital expenditures—through better utilization of in-progress construction and operational efficiencies—are expected to improve Intel’s capital allocation, support balance sheet strengthening, and open pathways for significant margin expansion as policy tailwinds and supply chain localization increase the company’s competitiveness and financial resilience.

Intel Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Intel compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Intel's revenue will grow by 4.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -36.2% today to 12.3% in 3 years time.
• The bullish analysts expect earnings to reach $7.5 billion (and earnings per share of $1.73) by about April 2028, up from $-19.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 23.6x on those 2028 earnings, up from -4.6x today. This future PE is greater than the current PE for the US Semiconductor industry at 22.9x.
• Analysts expect the number of shares outstanding to grow by 2.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.85%, as per the Simply Wall St company report.

Intel Future Earnings Per Share Growth

Risks

• Continued delays and challenges in advancing process nodes, such as the transition to Intel 18A and future 14A, leave Intel behind leading foundries like TSMC and Samsung, risking market share losses and exerting downward pressure on both revenue and gross margins over the long term.
  
• The persistent high capital and R&D expenditures required to build a competitive foundry business, combined with negative free cash flow and the need for significant factory investments, could sustain pressure on net margins and constrain earnings growth for multiple years.
  
• The secular shift toward custom silicon and ARM-based architectures by major hyperscale customers, as well as cloud-focused workloads eclipsing traditional enterprise and PC demand, risks eroding Intel’s x86 market opportunity and future revenue streams.
  
• Macro headwinds from trade policy volatility, potential tariff escalations, and the broader trend toward deglobalization threaten to inflate operational costs and disrupt Intel’s supply chain, adversely impacting profitability and revenue predictability.
  
• Ongoing reliance on older generation products (N-1 and N-2), along with normalized or declining long-term PC and traditional server demand, may limit growth in Intel’s core segments and challenge the consistency and sustainability of top-line revenue and earnings.

Valuation

• The assumed bullish price target for Intel is $27.84, which represents two standard deviations above the consensus price target of $21.78. This valuation is based on what can be assumed as the expectations of Intel's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $29.45, and the most bearish reporting a price target of just $14.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $61.3 billion, earnings will come to $7.5 billion, and it would be trading on a PE ratio of 23.6x, assuming you use a discount rate of 10.8%.
  
• Given the current share price of $20.34, the bullish analyst price target of $27.84 is 26.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.