Key Points
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Intel’s quarterly results were hampered by weak PC demand.
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Its AI business is growing, but not fast enough for Wall Street.
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Shares still don’t look overly cheap right now.
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Shares of Intel (NASDAQ: INTC) fell 23.4% in October, according to data from S&P Global Market Intelligence. The semiconductor giant has seen its share price begin to slip due to weak demand in the PC market, its second-largest revenue generator after artificial intelligence (AI).
There are also doubts about the future of its outsourced manufacturing foundry business. Here’s why Intel stock collapsed in October, and why it is now down over 50% from its highs.
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Revenue guidance disappointment
Intel is trying to build three business lines for the future of computing. First, it is selling computer chips for personal computers (PCs). Second is its own data center and AI computer chips. Third, it manufactures computer chips for third parties, a process called a foundry.
The second line is doing quite well at the moment, with Intel’s data center and AI segment posting 78% revenue growth to $7.3 billion last quarter. However, it is the traditional PC business that is showing signs of strain, with revenue down 5% last quarter and guidance for weak upcoming quarters. This is due to rising costs for computer chips around the globe, which is putting a dent in demand for people to buy their own computers.
Third is the foundry business. Its revenue grew 58% to $6.7 billion, but investors are expecting much more for a business that is backed by the U.S. government and important to the AI trade. Its largest competitor, Taiwan Semiconductor Manufacturing, grew revenue by 41% year-over-year, on a much larger revenue scale of $47 billion. Intel’s foundry business is also losing money at over $1 billion per quarter.
Intel’s shaky turnaround
Investors have made large bets on Intel as the United States’ champion in AI chip manufacturing. The stock is still up 57% over the past year, even after this drawdown.
However, when you look at its guidance vs. the stock’s valuation, it is hard to make a case for owning shares today. The stock trades at a market cap of $329 billion. Over the last twelve months, Intel’s revenue was $60 billion, or a price-to-sales ratio (P/S) of 5.3. The business is growing again but will face headwinds from the PC market and is not as well positioned to capitalize on the AI boom as investors would have liked.
For that reason, the stock is likely one to avoid for the time being.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Intel and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
