Intel Stock: Buy The Pullback (NASDAQ:INTC)

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We were previously bearish on Intel (NASDAQ:INTC), but we believe after a rough year, it’s time to move the company to a buy. Our bullish sentiment is based on our belief that INTC’s outlook for 4Q22 and 2023 takes into account the weak PC demand and soft cloud spending. We expect INTC’s financial performance to stabilize and even improve during 2023. Our buy thesis is driven by our belief that the market has finally priced in the weakness in the PC and cloud spending for the most part – something we hadn’t seen in previous quarters . We believe INTC is headed in the right direction to outperform expectations in 2H23.

Near macroeconomic headwinds show no sign of washing out soon; we believe the near-term market remains volatile. However, we believe INTC’s stock pullback over the past couple of quarters creates an attractive entry point for long-term investors, specifically as INTC expands and invests more seriously in its foundry business.

Pricing in the macroeconomic headwinds in the 4Q22 and FY23 outlook

We do not believe weak PC demand and soft cloud spending have washed out; instead, our bullish sentiment on INTC is because we believe the weakness is now priced in. Hence, we’re more constructive on the company outperforming financial expectations for 2H23. INTC’s 4Q22 outlook expects its three core segments (Client Computing (including Client PC), Data Center, and Edge) to see a sequential decline. INTC is forecasting weaker sales based on weaker TAM and as customers undertake inventory corrections to balance the supply-demand dynamics.

  • Client Computing Group (Client PC):

We believe the market has finally priced in the weakness in INTC’s core business, its PC business. Gartner forecasts worldwide PC shipments to decline 19.5% in the third quarter of 2022. INTC’s largest customers are feeling the churn of the weakening demand, and we expect INTC to feel the decline as PC Client Group makes up more than 50% of the company’s total revenue. INTC supplies major PC vendors including Lenovo (OTCPK:LNVGY), Dell (DELL), and HP (HPQ) all of which have reported negative Y/Y growth. We believe INTC’s declined shipments to customers will allow HPQ, DELL, and Lenovo to undertake inventory corrections for 2023. The following table outlines INTC’s vendor’s unit shipment estimates for 3Q22.

Unit shipment forcast

Gartner

While we’re more confident about INTC’s outlook post-earnings, we still believe the company’s PC TAMs are too high for the current macroeconomic environment. INTC forecasts PC TAM of 270-295M units for 2023. INTC’s Client Computing Group’s sales in 3Q22 were up 6% sequentially but down almost 17% Y/Y.

We believe INTC is headed in the right direction when it comes to Data Center Group as well. The company’s Data Center and AI Group suffered a 9% drop in sequential sales in 3Q22 and a 27% decline Y/Y. We expect the company will continue to see a soft cloud spending environment as the weakening consumer demand spills into cloud spending. We also believe the company may be pressured by competition in the data center market. Nevertheless, we think INTC’s market share loss will moderate significantly in 2023 as the market has priced in most of the weakness in the PC and cloud spending, as well as the market share loss to Advanced Micro Devices (AMD) and ARM-based CPUs. We’re more optimistic about INTC as we believe the company’s outlook encapsulates the macroeconomic headwinds for 4Q22 and 2023.

The following graph outlines the 3Q22 earnings for each of INTC’s segments.

Rev and trends

INTC 3Q22 earnings

What’s happening on the foundry front?

INTC’s working seriously to become the future face of the foundry business – America’s next chip-maker at home. We were previously skeptical about INTC’s capacity to become a meaningful foundry player as the Taiwan Semiconductor Manufacturing Company (TSM) dominates the market and is better positioned to outspend INTC. However, after the CHIPS Act approval and as the “Tech Wars” between the US and China escalate, we are more constructive about INTC’s ability to execute its foundry plans. We believe it will take time and a lot of capital for INTC to become a meaningful foundry player, but we believe the company is laying down a solid foundation. We expect it will be another 3 to 4 years before INTC becomes a meaningful foundry player. Our bullish sentiment is primarily for long-term investors who are interested in investing in the company’s future foundry business and PC market when macroeconomic headwinds ease.

Valuation

INTC stock is relatively cheap, trading at 14.4x on a P/E basis C2024 EPS $1.98 compared to the peer group average of 16.1x. The company is trading at 2.2x EV/C2024 Sales vs. the peer group average of 3.8x. We believe INTC stock provides an attractive entry point for the long-term investor at current levels.

The following chart illustrates INTC’s peer group valuation.

Valuation table

TechStockPros

Get on Wall Street

Wall Street is more bearish on the stock. Of the 41 analysts, 7 are buy-rated, 24 are hold-rated, and the remaining are sell-rated. We disagree with Wall Street’s bearish sentiment as we believe INTC is well-positioned to outperform in 2023 since the weakness has been priced into the stock and outlook for the most part. We expect to see INTC’s financial performance improve over the coming year. The stock is trading at $28. The median and mean price targets are set at $30 and $32, with a potential 7-14%.

The following chart illustrates INTC’s sell-side ratings and price targets.

Word on WallSt

TechStockPros

What to do with the stock

Now that INTC’s outlook for 4Q22 and FY2023 prices in the macroeconomic headwinds, we are moving the stock to a buy. We’re optimistic about the company’s financial performance for 2023. We expect INTC to be well-positioned to outperform in 2H23. We also believe INTC is building a solid foundry business in the long run. We think INTC stock may remain a little volatile in the near term as consumer demand remains weak, but we believe INTC stock provides an attractive entry point for long-term investors.

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