Elevating Future Growth, Strategic Investments And Innovation Propel Semiconductor Success

Key Takeaways

• Intel's disciplined cost management could boost net margins through operational efficiencies and expense control.
  
• The combination of advancing AI PCs, data center recovery, and strategic foundry initiatives, including novel EUV technology adoption, positions Intel for revenue growth and diversification.
  
• Supply constraints, dependence on external foundries, high start-up costs for new process nodes, foundry business losses, and server CPU market competition could affect Intel's financials.

Catalysts

Designs, develops, manufactures, markets, and sells computing and related products and services worldwide.

• Intel's focus on operational leverage and expense management, demonstrating a disciplined approach to cost reduction, could improve net margins.
  
• The enterprise refresh cycle and growing momentum for AI PCs are expected to drive revenue growth, particularly in the client computing segment.
  
• Data center recovery and the return to normal CPU buying patterns, combined with the ramping of accelerator offerings, are anticipated to increase revenues in the data center domain.
  
• Intel's announcement of significant grants, tax incentives, and loans as the National Semiconductor Champion indicates potential enhanced financial resources, possibly leading to increased R&D and capital expenditure, positively impacting future growth.
  
• Intel’s aggressive strategy in foundry services, including becoming the industry's first to use High NA EUV technology, and securing major clients like Microsoft, may significantly grow foundry revenues and diversify income streams.

Assumptions

• Analysts are assuming Intel's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.4% today to 10.4% in 3 years time.
• Analysts expect earnings to reach $7.2 billion (and earnings per share of $1.72) by about July 2027, up from $4.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $10.6 billion in earnings, and the most bearish expecting $5.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.9x on those 2027 earnings, down from 36.1x today. This future PE is greater than the current PE for the US Semiconductor industry at 30.1x.
• Analysts expect the number of shares outstanding to grow by 2.06% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 9.29%, as per the Simply Wall St company report.

Risks

• Supply constraints, specifically in wafer-level assembly impacting AI PC CPU shipments, could affect the ability to meet high demand and impact revenue growth in the short term.
  
• Reliance on external foundries for manufacturing certain tiles may limit flexibility in rapidly adjusting product roadmaps or supply chains, potentially impacting gross margins and revenue.
  
• Start-up costs associated with the ambitious goal of launching 5 process nodes in 4 years are expected to peak in 2024, potentially impacting net margins through increased expenses.
  
• Intel's foundry business is facing operating losses that are expected to continue into the near term, which could negatively affect overall net income and earnings as it works towards profitability.
  
• Competition in the server CPU market and the impact of generative AI on server product demand and design could influence Intel's market share and revenue from its data center segment.

Valuation

• The analysts have a consensus price target of $38.97 for Intel based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $68.0, and the most bearish reporting a price target of just $17.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $69.6 billion, earnings will come to $7.2 billion, and it would be trading on a PE ratio of 31.9x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of $34.46, the analyst's price target of $38.97 is 11.6% 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.