Intel Corp_ logo on mobile phone-by Piotr Swat via Shutterstock
Intel (INTC) is reportedly considering laying off between 15% and 20% of its foundry workers, which could impact thousands of employees. The layoffs come after a brutal 2024 when the once-iconic chip company eliminated 15,000 positions in its biggest-ever layoff.
While we don’t have the official confirmation, the layoffs would be hardly surprising given the company’s focus on cost cuts amid mounting losses and cash burn, particularly in the foundry business, which has failed to take off significantly despite burning billions of dollars. In this article, we’ll discuss Intel’s outlook in light of the cost cuts and turnaround efforts.
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Intel is currently in its second inning of a turnaround under new CEO Lip-Bu Tan, who took over earlier this year. Notably, when his predecessor Pat Gelsinger took office in 2021, he also embarked upon “transforming” Intel under the IDM 2.0 strategy, which, in hindsight, we know did not go as planned.
Intel continues to lose market share and is majorly losing out to Nvidia (NVDA) in the artificial intelligence (AI) chip market. The pivot to the foundry business, where Intel makes chips for third parties under contract manufacturing, also failed to get traction while that segment’s losses mounted.
Tan has spoken about building a “new Intel” and has stressed that there are no “quick fixes” to the company’s woes. He admitted that the company lost out on talent and has talked about the need to revamp the company’s culture by fostering a “startup” mindset.
Sell-side analysts have been in a “wait and see” mode when it comes to Intel, which is reflected in its ratings. Of the 38 analysts covering Intel, 32 rate it a “Hold.” The stock is rated as a “Strong Buy” by only one analyst while five rate it as a “Strong Sell.” Intel’s mean target price is $22.42, which is 7.8% higher than the June 17 closing price. Its Street-low target price is $14, implying downside of 32.7%.
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Notably, while Intel has slumped over 70% from its 2021 highs, it does not necessarily mean that the stock is undervalued, as the price action is not too out of sync with its financial performance. For instance, last year it posted revenues of $54.2 billion with an adjusted gross margin of 36% and adjusted net loss of $600 million.
In contrast, in fiscal year 2021, it posted revenues of $79 billion with a healthy adjusted gross margin of 57.7% and adjusted net income of $22.4 billion. The company’s cash flows have also fallen prey to the burgeoning losses and capex in the foundry business, and it has posted negative free cash flows for three consecutive years.
The result has been a steep rise in its leverage ratios, and the company’s long-term debt soared to $46.2 billion at the end of 2024, an increase of almost $13 billion since the end of 2021. Credit rating agencies have also taken note of its weak financial condition, and last year, Moody’s and S&P Global cut Intel’s credit rating.
Intel remains a turnaround play and could see a rerating if Tan can steer the long-awaited turnaround. Talking about valuations, given its current depressed earnings, it won’t be prudent to look at earnings-based valuation multiples. The stock trades at a forward enterprise value-to-sales multiple of 2.53x, which is slightly higher than the last three years’ average. Meanwhile, INTC trades at just 0.83x its book value, which might look quite tempting as a ratio below 1x is a sign of undervaluation.
Previously, there have been reports of various companies being interested in buying Intel’s foundry business, but none of these have come to fruition. I believe there is potential for value unlocking for Intel shareholders as the company explores its options under the new CEO, who has floated the possibility of spinning off non-core businesses.
For now, though, the layoffs should help Intel cut down its costs and help uplift its margins that have plummeted over the last couple of years. However, Intel needs to return to top-line growth sooner rather than later, which is easier said than done as it faces intense competition from the likes of Advanced Micro Devices (AMD) in the PC chip market and Nvidia in the AI GPU market.
Intel’s foundry business could help revive growth as hyperscalers are developing their custom chips and need partners with foundries to manufacture these. However, Intel would need to compete with the formidable Taiwan Semiconductor Manufacturing Company (TSM), which is setting up new plants in the U.S.
Overall, Intel remains a “show me story” trading at a fair valuation, and the ball lies in the company’s court. It needs to display some solid execution and strategic actions to drive shareholder value.
On the date of publication, Mohit Oberoi had a position in: INTC, NVDA. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
