Finance
Intel crashed 30%. Is the stock a sell or a bad news buy?
Intel‘S (NASDAQ: INTC) CEO Pat Gelsinger said he was disappointed with the chipmaker’s second-quarter results — and he wasn’t alone. The market approved of the company’s performance, sending the stock down 30% in one trading session last week. In its earnings report, Intel fell short of analyst expectations, predicting a weak period ahead and announcing a $10 billion cost-cutting plan that includes major job cuts.
This comes as the company, which has fallen behind in the artificial intelligence (AI) race, aims to gain market share there, become a giant in the AI personal computer (PC) industry, and to work towards his goal of becoming number 2 in the world. chip foundry by the end of the decade.
Now your question might be whether Intel’s latest news is a warning sign for investors or simply a painful but necessary period to go through to achieve growth over time. Let’s see if this stock is a buy or a buy on bad news.
A CPU giant
First a little background. Nvidia focused heavily on AI early in the game, and this has led to the company dominating the AI chip market, with an 80% share. But Intel, a giant in the market for central processing units (CPUs) – the most important chip in a given computer – is struggling to keep pace in the fast-growing AI sector. So while Nvidia’s annual revenue has soared recently, Intel’s has been declining.
Intel is looking to turn things around with a renewed focus on AI, recently introducing a number of new products, and a leadership goal in PCs aimed at you and me that are fully equipped for AI tasks. The company has also opened its foundry operations to others and, as mentioned, aims to become a leader in this field within a few years.
But this transition to growth won’t happen overnight, and the company will have to overcome some bumps along the way. In its second quarter report, Intel reported a 1% decline in revenue to $12.8 billion and adjusted earnings per share of $0.02 – both missing analyst estimates.
The company said this achievement was due to its own decision to ramp up its Core Ultra AI CPUs and other moves to better position itself for the future. For example, the chipmaker moved production of its Intel 4 and 3 wafers from Oregon to its large-scale factory in Ireland. Here, costs are higher in the short term – which weighs on profits – but this move will improve gross margins in the long term as the business scales.
Intel also said the company expects operating losses to continue at the same pace in the third quarter as most of the wafer volume comes from its older process nodes, which are less cost and energy efficient.
Intel’s cost reduction plan
Finally, as part of its recovery and growth journey, Intel has launched a $10 billion cost-cutting plan that will see the company reduce its workforce by 15% and suspend its dividend starting in the fourth quarter.
Now let’s get back to our question: Is the stock a sell or a bad news buy? Is the latest news a warning or a necessary step that will lead to growth?
First, it’s important to say that a share price decline isn’t surprising. Intel gave investors a lot of bad news to digest in just one report. And it’s clear that the next few years could mean quite a bumpy road for Intel as it reorganizes its cost structure, ramps up spending in certain areas and manages the impact on profits, and tries to achieve its goals.
Still, accepting short-term short-term gains could lead to a big win down the road. The AI personal computer, to name just one area of Intel’s investment focus, now represents less than 10% of the market but is expected to grow to more than 50% by 2026.
Intel’s foundry forecast
Additionally, as Intel shifts wafer production to newer processes, the company should reduce cost pressure on margins. And Intel maintains its forecast that the foundry sector will break even by 2027.
So there are a lot of moving parts that Intel hopes will come together later this decade. And if they do, the company could see growth increase and its stock price could follow suit.
Taking all these points into account, Intel’s latest news represents a difficult but necessary period to go through so that the company can achieve its goals. Times like this come with a fair amount of risk, so stocks aren’t the best choice for a cautious investor right now. In the event of a new disappointment, the economy could stagnate or decline even further.
That said, I wouldn’t sell the stock unless I needed the money for other purposes. Over time, Intel could win this new bet on growth.
And if you’re an aggressive investor, you might even consider buying up a few shares of Intel with the idea of holding on for at least five years. If Intel achieves its goals, you won’t regret it. get in early about this recovery story.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls to Intel and short August 2024 $35 calls to Intel. The Motley Fool has one disclosure policy.
Intel crashed 30%. Is the stock a sell or a bad news buy? was originally published by The Motley Fool
