Intel's Recovery Potential: Is a $35 Price Target Within Reach for NASDAQ:INTC?

Rebuilding Intel (NASDAQ:INTC) Amidst Restructuring and Foundry Losses

Intel (NASDAQ:INTC) has seen significant restructuring in recent times, with the appointment of new CEO Lip-Bu Tan marking a pivotal moment in the company's turnaround efforts. Intel’s recent troubles, primarily tied to its foundry segment, have sent shockwaves through its financials, with losses mounting significantly. However, as Intel shifts its strategy and considers potential joint ventures, the company's path forward could hold valuable investment opportunities.

Intel's Foundry Struggles: A Major Drag on Performance

Intel Foundry Services (IFS) has become the company’s biggest source of concern. In FY 2024, this segment suffered a massive loss of $13.4 billion on revenues of only $17.6 billion, highlighting an unsustainable operating loss ratio. To break it down further, this translates to a staggering loss of 76 cents for every dollar IFS brought in. In the most recent quarter, the company reported a $2.3 billion operating loss in its foundry business, showing slight improvement but still deep in negative territory. A comparison of Intel's operating income over the past five quarters reveals a consistent downward trend, with the foundry business being a major drag on overall profitability.

The question for investors is whether Intel can turn this around. The stakes are high, as the foundry segment continues to consume vast amounts of capital while producing negative returns. Intel has made considerable investments in its foundry operations but must urgently seek a solution to mitigate these immense losses. At the current trajectory, Intel faces significant challenges to become profitable in this segment, which accounts for a considerable portion of the company's operations.

Potential Joint Venture with TSMC: A Game-Changer for Intel's Foundry Business

Intel’s potential joint venture with Taiwan Semiconductor Manufacturing Company (TSMC) could represent a significant turning point for the company's foundry operations. As of March 2024, TSMC announced a massive $100 billion investment in the U.S. semiconductor industry, potentially paving the way for Intel’s involvement in a deal to restructure its struggling foundry business.

Intel’s foundry segment has a core strategic value for U.S. chip production, especially with U.S. government incentives under the CHIPS Act. However, Intel's high operational costs and continuing losses make it an attractive candidate for a partnership or joint venture. The partnership could allow Intel to offload some of its costs onto another financially strong player like TSMC while also benefiting from TSMC’s extensive network and expertise.

A joint venture with TSMC would also position Intel as a key player in U.S.-based chip manufacturing. TSMC’s existing dominance in the global foundry market, responsible for roughly 60% of global foundry revenues, makes it an ideal partner. In exchange for its involvement in this joint venture, Intel would likely retain a significant minority stake, ensuring it can still maintain control of this strategic business while sharing operational burdens.

Restructuring and Leadership Change: A New Direction for Intel

The appointment of Lip-Bu Tan as Intel's new CEO marks an important shift in the company's culture and strategic direction. Lip-Bu Tan, a seasoned semiconductor executive with deep industry ties, brings a wealth of experience from his tenure at Cadence Design Systems, where he led significant cultural and operational shifts. His leadership is expected to play a crucial role in revitalizing Intel's operations, particularly its foundry segment.

Tan’s appointment has been met with optimism in the market, with investors hoping that his fresh perspective and expertise in the semiconductor sector will help turn the company’s fortunes around. His primary focus will be to strengthen Intel’s foundry business and improve operational efficiencies, areas where the company has long struggled. As part of this shift, Tan is expected to implement significant cultural changes within Intel, breaking away from the bureaucratic structures that have stifled innovation and competitiveness within its manufacturing unit.

One of the immediate challenges for Tan will be to navigate the complex dynamics within Intel’s foundry segment, especially as the company tries to establish itself as a serious contender in the external foundry market. Lip-Bu’s leadership could help Intel break free from its long-standing internal constraints and foster a customer-focused culture, an area where Intel has historically lagged behind its competitors.

The Role of Intel's Foundry Business in Future Growth

Intel has long been a leader in chip design and manufacturing, but its foundry business has struggled to gain traction. As of Q4 2024, Intel's foundry revenues have been declining, and the division has failed to match the pace of its competitors, notably TSMC and Samsung. Intel’s financials have shown that, despite substantial investments in its foundry capabilities, the division continues to operate at a loss.

Intel Foundry’s future success hinges on its ability to attract external customers and reduce its high operating costs. A key aspect of Intel’s restructuring strategy involves rolling out new manufacturing technologies, such as the upcoming Intel 18A fabrication process. This advanced technology is expected to become a critical part of Intel’s recovery, providing it with a competitive edge in the foundry market. However, the company must first overcome significant hurdles related to customer trust, IP security, and the competitive landscape.

Valuation and Investment Potential: A Bargain at 21X Forward Earnings

Despite its operational struggles, Intel is currently trading at a relatively low valuation, with a forward P/E ratio of 21X based on FY 2026 earnings estimates. For comparison, its competitors Nvidia and AMD are trading at similar or higher multiples, indicating that the market has priced in considerable growth for these companies. However, Intel’s potential for a turnaround, particularly if a strategic deal or joint venture with TSMC materializes, presents significant upside potential.

Intel's stock price has shown resilience, even in the face of negative news, and the company’s market valuation reflects this uncertainty. However, if Intel can successfully execute on its restructuring plans and improve its foundry business, it could experience substantial upside. A break-up or spin-off of Intel’s products and foundry segments could unlock significant value for shareholders, especially if the company can achieve higher margins in its foundry operations.

At its current price, Intel’s shares are undervalued relative to its intrinsic value, particularly when considering the potential value of its Intel Products division, which continues to dominate the CPU market with a market share approaching 80%. This presents a unique opportunity for long-term investors, as Intel’s stock may be poised for a revaluation, especially if the company can stabilize its foundry business and capitalize on the upcoming Intel 18A node.

Risks and Challenges Ahead for Intel

While Intel’s stock presents a compelling investment opportunity, several risks remain. The most significant risk is the continued competitive pressure from TSMC, AMD, and Nvidia, which could limit Intel's growth prospects in both the CPU and foundry markets. Intel’s inability to return to profitability in its foundry business could further depress its stock price, as investors continue to see the segment as a drag on overall performance.

Additionally, Intel’s restructuring efforts may take longer than expected, especially if Tan’s leadership struggles to overcome the entrenched bureaucracy and cultural challenges within the company. Intel’s ability to retain and attract talent, particularly in the face of competition from other semiconductor giants, will be critical to its long-term success.

Conclusion: A Strong Buy for Intel (NASDAQ:INTC)

Despite the challenges facing Intel, the company’s restructuring efforts, combined with the potential for a strategic partnership or joint venture with TSMC, present significant upside potential for investors. At its current valuation, Intel is a bargain, and the stock is likely to see a revaluation as the company executes its turnaround strategy.

With a forward P/E ratio of 21X and substantial growth potential in its Intel Products division, Intel has a path to a more profitable future. The hiring of Lip-Bu Tan and the potential for a restructuring or spin-off of the company’s divisions provide further catalysts for growth. Based on the current data and valuation, Intel is a strong buy, with a potential upside of around 38% in the next 12 months, assuming successful execution of its restructuring plans.

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