Intel Stock Just Got Slammed. Should You Buy the Dip or Cut Your Losses?

Intel (NASDAQ: INTC) stock had a banner year in 2023, but it wasn’t because of the company’s performance. Investors ignored both a dividend cut and its weak results during a cyclical slowdown in PC sales, and instead bet that the legacy chip stock would be among the winners in the new generative artificial intelligence (AI) revolution.

Intel’s first earnings report in 2024 seems to be casting doubt on that thesis after the stock fell 12% on Friday. The diversified chip designer and manufacturer actually beat estimates in its fourth-quarter report. Revenue rose 10% to $15.4 billion, ahead of the consensus at $15.16 billion, while adjusted earnings per share jumped from $0.15 to $0.54, topping expectations at $0.45.

If Intel had stopped there, the stock might have gained, but its first-quarter guidance showed that this momentum is grinding to a halt. For the current period, the company expects revenue of $12.2 billion to $13.2 billion, which represents 15% growth at the midpoint from a weak performance a year ago, but is considerably worse than the consensus at $14.1 billion. It also forecast adjusted earnings per share of just $0.13 for the current quarter, below estimates of $0.33.

While management didn’t give a full-year forecast, it expressed optimism that results would improve later in the year. For example, CFO David Zinsner said on the earnings call that data center revenue would decline by double digits in the first quarter but improve over the rest of the year as it fulfills orders for discrete accelerators.

Intel should also benefit from recovering demand for PCs, a category that is expected to grow by low single digits in 2024, and the company has a slew of new products including Gaudi2 AI accelerators and AI PC products like the Intel Core Ultra, its most AI-capable and power-efficient PC processor, that it expects to drive growth.

After nearly doubling last year but tumbling on its recent earnings report, Intel stock seems to be at a crossroads. Is it a buy today? Let’s examine the arguments.

A pair of tweezers holding a computer chip above a circuit board.

Image source: Getty Images.

What Intel needs to keep gaining

Even with its surge last year, Intel stock is still priced below where it traded during the pandemic, but the stock has a long track record of underperforming the market and losing market share to more nimble fabless rivals like Advanced Micro Devices.

In order for its stock to keep gaining, essentially two things have to go right for Intel. It needs the PC market to recover and it needs to capitalize on that increasing demand. The company touted its AI PC chips on the call, but Intel no longer has an iron grip on the PC market the way it did 20 years ago.

Plus, the AI PC era promises to be even more competitive as rivals like AMD and Nvidia, which just unveiled its own AI PC chips, are eager to capitalize on the new opportunity. Investors will also be watching Intel’s broader efforts in AI in areas like data centers, even as it acknowledged that some demand has shifted away from its strength in CPUs toward accelerators.

Finally, Intel has an opportunity in its foundry services, a market that Taiwan Semiconductor dominates. Chip manufacturing is in high demand, and Intel’s plans to build several new factories in the U.S. and around the world could help establish it as a significant player in contract chip manufacturing.

How investors should play Intel

Thus far, the rising AI tide has lifted nearly every boat in the semiconductor sector, but it won’t be like that forever. Eventually, the pretenders will be separated from the contenders.

One quarter’s outlook isn’t enough to judge Intel’s prospects for the year, especially given its favorable commentary, but it is clear why investors were disappointed, especially considering the company’s hyped-up AI event last month.

At this point, Intel doesn’t have the same credibility as peers like AMD, Nvidia, or Broadcom, which have made smart strategic moves and have delivered market-trouncing returns over the last decade. Similarly, CEO Pat Gelsinger hasn’t yet earned the benefit of the doubt from investors. With competition increasing in the AI PC market, including from Nvidia, Intel is also facing a new set of challenges that could stymie its expected recovery in its core personal computing market.

Gelsinger called Friday’s sell-off “overstated,” and that opinion could be borne out over the coming months, but there are other chip stocks, including the ones above, that seem much easier to own at this point, and more likely to be successful in an AI-first world.

Investors will have a better sense of Intel’s prospects after peers like AMD report earnings this week. If Intel’s competitors offer more promising first-quarter guidance than it did, that should be a clear sign that Intel is still at a disadvantage against the competition.

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Jeremy Bowman has positions in Broadcom. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

Intel Stock Just Got Slammed. Should You Buy the Dip or Cut Your Losses? was originally published by The Motley Fool

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