Transforming Operations And AI Development Will Offset Complexity Risks

Key Takeaways

• Organizational complexity and inefficiencies hinder innovation, affecting revenue growth as Intel undergoes structural transformation and headcount reductions.
  
• Supply constraints from reliance on older manufacturing nodes and geopolitical risks could impact revenue and gross margins amid macroeconomic uncertainties.
  
• Streamlining operations and focusing on AI and foundry businesses could enhance Intel's profitability, financial stability, and market position.

Catalysts

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

• Intel faces substantial organizational complexity and bureaucratic inefficiencies which are suffocating innovation and agility, potentially leading to lower net margins and affecting revenue growth negatively as decisions are stalled and execution suffers.
  
• The company's focus on radically transforming its structure, including significant headcount reductions, aims to cut operating expenses to $17 billion in 2025 and $16 billion in 2026. However, the benefits could take time to materialize, putting short-term pressure on profit margins and earnings.
  
• Intel's reliance on its older manufacturing nodes is creating supply constraints as Raptor Lake demand exceeds available capacity, potentially leading to missed revenue opportunities and exerting pressure on gross margins if high-margin newer products like AI PCs ramp up slower than expected.
  
• The macroeconomic uncertainty, potentially coupled with tariffs and geopolitical risks, may result in a contraction of the total addressable market, impacting revenue projections and indicating potential downside risks to both gross margins and earnings.
  
• Intel's transition towards a foundry model to compete with established players like TSMC involves significant cultural and operational changes that might not immediately yield the desired customer trust or volume ramp necessary to enhance revenue and profitability soon.

Intel Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Intel compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Intel's revenue will decrease by 0.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -36.2% today to 6.6% in 3 years time.
• The bearish analysts expect earnings to reach $3.4 billion (and earnings per share of $0.21) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 35.1x 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 10.88%, as per the Simply Wall St company report.

Intel Future Earnings Per Share Growth

Risks

• Intel's focus on transforming its organizational structure and improving innovation could lead to better product offerings and faster time-to-market, potentially enhancing revenue growth and net margins.
  
• Efforts to cut operating expenses by simplifying the business and streamlining operations could improve net margins by reducing costs significantly in the coming years.
  
• Investments in developing AI solutions and refining Intel's product roadmap for AI workloads might position the company to capitalize on the growth of AI-related markets, potentially boosting earnings.
  
• Intel's strategy to build trust with foundry customers and ramp up its Intel 18A process technology might increase foundry business revenue, which could result in higher overall earnings and improved gross margins.
  
• The initiatives to strengthen the balance sheet by focusing on deleveraging and monetizing non-core assets could improve financial stability and investor confidence, potentially leading to better returns and profit margins.

Valuation

• The assumed bearish price target for Intel is $18.61, which represents one standard deviation below the consensus price target of $21.67. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be $51.6 billion, earnings will come to $3.4 billion, and it would be trading on a PE ratio of 35.1x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $20.09, the bearish analyst price target of $18.61 is 7.9% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.