With its shares trading down more than 57% so far in 2024 while the S&P 500 is up roughly 18%, it's pretty clear that Intel(NASDAQ: INTC) is having a difficult year.
Much of Intel's struggle is tied to its floundering foundry business. This business manufactures semiconductor chips for itself as well as for other chipmakers, and it is a rival to Taiwan Semiconductor Manufacturing. Intel started the unit in 2021 to help revive its overall business, but since then it has largely just piled up losses, including a $2.8 billion operating loss last quarter and $5.3 billion loss through the first half of the year.
In a public letter released recently, the company detailed plans it hopes will help turn around its business.
Foundry plans
The biggest news was that the semiconductor company will turn its foundry business into an independent subsidiary. While the leadership team will remain the same and continue to report to Intel's CEO, it will also create its own board that will include independent directors.
The company said the separation of the business into a subsidiary will give customers more transparency into the foundry business. The business could also pursue outside funding and have a separate capital structure from Intel.
Intel said one of the keys with its foundry business will be to improve its capital efficiency. It said now that it has transitioned to extreme ultraviolet lithography (EUV) manufacturing technology, it is time to move from a period of rapid investment to a more normalized one. As part of this, it will delay projects in Germany and Poland, while continuing to build out plants in the U.S.
In conjunction with the letter, the company also announced that it was awarded $3 billion in direct funding from the U.S. government as part of the Secure Enclave program under the CHIPS and Science Act. The award will help it fund projects in Arizona, New Mexico, Ohio, and Oregon.
The company also announced an expanded deal with Amazon, in which the two companies will co-invest in custom chip designs. Intel's foundry will also produce artificial intelligence (AI) fabric chips for Amazon Web Services using Intel's newest 18A technology, as well as Xeon 6 chips using its Intel 3 technology.
This is good news for a company needing some, especially after it was widely reported earlier this month that Broadcom rejected Intel's new 18A technology as not being ready for high-volume production after tests. Of course, this doesn't solve all of Intel's foundry issues. Questions will remain until the foundry begins manufacturing chips at high volumes using the technology, which it plans to do next year.
Image source: Getty Images.
Is Intel's stock set to rebound?
The separation of the foundry into a new subsidiary could set the stage for Intel to fully spin off the business. While this wouldn't fix the situation for Intel, it would remove a problem (as well as the losses and capital expenditures (capex) it was pouring into the struggling business).
However, the foundry isn't the only issue the company is dealing with right now. In its products segment, two of its three product categories saw revenue declines last quarter, with data center and AI revenue down 3% to $3 billion and network and edge revenue edging down 1% to $1.3 billion.
Meanwhile, subsidiary Altera's revenue plunged 57% year over year and spinoff MobileEye's revenue fell 3% (Intel still owns a controlling stake in MobilEye). Neither acquisition has particularly worked out for the company.
The only part of Intel's business that performed well last quarter was its client computing group, which saw revenue rise 9% year over year to $7.4 billion. However, this business is clearly in the crosshairs of Arm Holdings, which has said it is looking to capture a 50% market share in the Windows-based PC market in the next five years. This would be a big blow to Intel.
Intel currently trades at a forward price-to-earnings (P/E) of 18 times next year's analyst estimates, which seems a bit high given its struggles.
INTC PE Ratio (Forward 1y) data by YCharts
However, its core product business might be able to do about $2.10 in earnings per share (this assumes about $12 billion in product segment operating income, a 25% tax rate, and 4.3 billion shares) versus the $1.20 analyst estimate for the whole company that includes losses from the foundry business. That would put its core business closer to a 10 times forward P/E. That's not expensive, and then there is still value in the Altera, MobileEye, and foundry businesses.
I think there is some potential for the stock to see a boost as it looks to potentially spin off its foundry and later the Altera business, planned for 2026. However, the company still has a lot of work to do to improve its overall situation.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom, Intel, and Mobileye Global and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
