After a disastrous start to the year, microchip giant Intel Corp. (NASDAQ:INTC) looks to be moving in the right direction and its stock is responding.
Year-to-date, INTC stock is up 45%, including a 35% gain in the last six months. However, investors needn’t worry that they’ve missed the big move higher or that there isn’t more runway ahead. Intel’s share price is currently trading 20% lower than where it was at five years ago, an indication of how beaten down the stock had become. But with conditions improving and a major shift in the company’s business strategy coming together, now is an opportune time to invest in INTC stock.
On the Rebound
Intel started the year by posting the biggest loss in the company’s 55-year history. For the first quarter, Intel announced a 133% annual reduction in its earnings per share and said that its revenue declined 36% from a year earlier to $11.7 billion. The loss worked out to 4 cents per share. The first quarter marked the fifth consecutive quarter of falling sales and the second consecutive quarter of losses at Intel.
The company blamed the poor financial results on its efforts to restructure its factories as foundries that can make microchips for other companies. By 2026, Intel hopes to manufacture chips as advanced as those made by Taiwan Semiconductor Manufacturing Co. (NYSE:TSM), and that it can compete for custom work like Apple’s (NASDAQ:AAPL) A-series chips found in iPhones.
As one might expect, INTC stock fell like a stone on the Q1 report as bearish sentiment spiked and analysts questioned the company’s direction. However, the downturn was short lived, as Intel quickly rebounded with improved financial results for this year’s second and third quarters. Immediately after its recent Q3 print, INTC stock jumped 7% higher after its results beat Wall Street forecasts.
For Q3, Intel impressed with EPS of 41 cents which was nearly double the 22 cents expected among analysts. Revenue amounted to $14.16 billion versus $13.53 billion that had been forecast. While analysts and investors liked the earnings themselves, they especially like that Intel executives reiterated plans to cut costs by $3 billion this year. The company’s operating expenses declined 15% in Q3 from a year ago.
Following the terrible first-quarter results, Intel announced a cut in executive compensation ranging from a 5% trim to the base pay of mid-level executives to a 25% haircut in the pay of CEO Pat Gelsinger. Intel also lowered its 401(k) matching contributions to 2.50% from 5% and suspended all pay raises and bonuses. Taken together, the company’s improved earnings and efforts to reduce costs have inspired confidence on Wall Street.
Pivot to a Foundry
Intel’s ambition is to pivot from designing microchips and semiconductors to competing head-to-head with TSMC, which currently makes 60% of the world’s microchips.
By 2026, Intel wants to compete for contracts to build high-performance microchips for companies ranging from Nvidia (NASDAQ:NVDA) to Qualcomm (NASDAQ:QCOM). To that end, Intel is investing billions to develop chip factories all over the world as it seeks to dominate in chipmaking.
This past summer, Intel announced plans to spend $33 billion to build two new chip fabrication plants in Germany, $4.6 billion on a chip plant in Poland, and $25 billion on a factory in Israel. The company plans to build chip complexes in Ireland and France, as well as multiple plants in the U.S., including a $20 billion semiconductor plant in Ohio. The heavy spending comes as semiconductor manufacturing is expected to become a trillion-dollar industry by 2030, according to McKinsey & Co.
The multi-year shift to becoming a fabricator of microchips and semiconductors has put the patience of the investors to the test. Analysts have questioned how the pivot will improve Intel’s gross margins.
In April, the company said its gross margin for this year’s first quarter was 38.4%, half what it was a year earlier. However, Intel executives have said they are aiming for 60% margins going forward. And there are signs that the transformation is taking hold.
Spinoffs & Insider Buys
To help smooth the way to becoming a chip foundry, Intel is spinning off its programmable chip business with plans to take it public through an initial public offering in 2024. Intel acquired the programmable chip business when it bought Altera for $16.7 billion in 2015. Altera was a leader in field-programmable gate array microchips that are used in the industrial, automotive and defense sectors.
The Programmable Solutions Group’s standalone operations will begin on Jan. 1, and Intel will report its financials as a separate business unit, starting with its first quarter 2024 results. The IPO should occur over the next two years. In 2022, Intel completed a successful IPO of its Mobileye Global (NASDAQ:MBLY) business unit, which makes microchips and software for self-driving vehicles.
The most recent news from Intel is that CEO Pat Gelsinger has been buying large chunks of the company’s stock. Regulatory filings show Gelsinger paid $250,000 between Oct. 31 and Nov. 1 to purchase 6,775 Intel shares at an average price of $36.80 each.
Gelsinger owns over 475,000 shares of INTC stock worth $18 million. Gelsinger’s repeated purchase of Intel stock this year is seen as a vote of confidence.
The latest stock purchases by Gelsinger come as rumors swirl Intel is the leading candidate to receive billions of dollars in government funding for secure facilities producing microchips for U.S. military and intelligence applications, though no contract has been formally announced.
INTC Stock Is A Buy
It’s not been without pain and it’s taken time, but Intel looks to be moving in the right direction. The major shift from being a microchip designer to becoming a microchip fabricator looks to be on track despite costing billions of dollars to execute.
Investors willing to take a position in Intel shares now and exercise some patients are likely to be rewarded in coming years with hefty returns on their capital. As it moves into the next phase of its existence, INTC stock is a buy.
On the date of publication, Joel Baglole held long positions in AAPL and NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
