Wall Street is increasingly discounting Intel Corp. amid its high expenses and disappointing earnings, attracting interest from opportunistic potential buyers.
Ultimately, investors are looking for heavy investments in Intel's foundry business, which manufactures chips, to pay off. In 2025, the company is expected to start high-volume production of its new 1.8-nanometer manufacturing process, also called 18A, which should position Intel to better compete with leading-edge chip manufacturers Taiwan Semiconductor Manufacturing Co. Ltd. and Samsung Electronics Co. Ltd. Yet it could take years for the foundry business to turn a profit: The operating loss for Intel's foundries is expected to peak in 2024 but continue in the red at least until 2027, according to consensus estimates from Visible Alpha, a part of S&P Global Market Intelligence.
In the near-term, Intel also is working through a weaker-than-expected cyclical recovery in its core sales, including the legacy PC chip business, which is weighing on its earnings.
When isolating the foundry operations, Intel's legacy PC chip business is valued at about 10x earnings, one of the lowest valuations in recent years. In contrast, competitor Arm Holdings PLC commands a price-to-earnings ratio of 212x, while QUALCOMM Inc.'s ratio is 16x earnings, according to Visible Alpha.
Analysts expect Intel's overall profitability to improve going forward, owing to revenue and profit expansion in the products business, as well as smaller losses in the foundry.
Notably, with 18A, Intel would be ahead of foundry competitors like TSMC and Samsung, with Amazon.com Inc. and the US Department of Defense lined up to be some of Intel's first customers.
Intel is expected to achieve a net income of $16.7 billion in fiscal year 2028 compared with $1.1 billion in 2024, according to Visible Alpha data. Few semiconductor companies are expected to attain such revenue and profit growth in the next five years.
This makes Intel one of the cheapest stocks in the semiconductor space relative to estimated earnings. "Intel is expected to grow earnings per share to $2.07 at the end of 2026, putting consensus P/E at around 12x, a significant discount to comparable stocks in the space," said Melissa Otto, an analyst at Visible Alpha.
Intel appears poised to become an increasingly inexpensive acquisition target further into the future. According to Visible Alpha's AI Monitor, Intel is currently the least-valued stock based on projected 2028 earnings, trading at a P/E ratio just above 6x. This places it behind companies like Super Micro Computer Inc. and Dell Technologies Inc., which have historically operated with significantly lower gross margins.
Already, would-be buyers are taking a look at the chipmaker. Qualcomm and ARM are among the semiconductor firms that have reportedly expressed interest in buying all or part of Intel. For strategic buyers like Arm and Qualcomm, acquiring Intel's assets could speed up entrance into new markets and eliminate competition. Financial sponsors are also courting Intel, with Apollo Global Management Inc. reportedly interested in making a $5 billion investment.
Despite the attractive valuation, an Intel deal would carry its own share of risk.
"While personal computer and data center end markets reached the bottom of the cycle in mid-2023, the sales rebound in Intel's core markets have been tempered in the first half of 2024 and pressure will likely last through the rest of the year," said S&P Global Ratings analyst Trevor d'Olier-Lees in a recent research update.
Compounding the near-term concerns are secular challenges that threaten Intel's long-term viability. The company's dominance in the PC and data center sectors has waned, with Advanced Micro Devices Inc. capturing market share. The competitive landscape is intensifying, with QUALCOMM Inc. setting its sights on the PC market following its success in smartphone chips.
While Intel's struggles have made it a cheaper target, some observers say they have also made it a less attractive one.
"We believe value plays in tech are not a winning strategy," said Arun Bharath, chief investment officer at Bel Air Investment Advisors, in an interview. "In tech there is a winner takes all mentality. Once you've lost the moat around you, it is very difficult to regain it."