Intel Stock Is Down, but Is It Also Out?

Intel Stock Is Down, but Is It Also Out?

Intel (NASDAQ: INTC) is a stock that investors could easily dismiss. The longtime leader in the semiconductor industry has been eclipsed by Nvidia and AMD -- and amid the staggering costs of entering the foundry business, many investors have turned their backs on the chipmaker.

The good news for Intel is that artificial intelligence (AI) has led to a massive spike in semiconductor demand. This and the enormous government subsidies highlight why Intel stock should eventually return to growth. Plus, a largely overlooked factor should help ensure that success.

Intel's saving grace

Amid its entry into the foundry business, Intel may succeed simply because the government needs it to succeed. Here's why.

Currently, Taiwan Semiconductor Manufacturing (TSMC) is the leading chip producer, with about two-thirds of the world's semiconductor production taking place in Taiwan, according to TrendForce. This is gravely concerning to the U.S. government because of Taiwan's proximity to China and its longtime threats to invade the island.

Hence, the U.S. and other countries have offered tens of billions of dollars in subsidies to chipmakers like Intel to manufacture chips at home. Admittedly, Intel lags behind TSMC and Samsung technologically, and both of those companies are building foundries in the U.S.

Nonetheless, Intel has more foundries in the U.S. than any other company. Also, besides TSMC and Samsung, Intel is the only company buying the advanced equipment from ASML necessary to build the world's most advanced chips. The purchase of ASML's most advanced equipment is part of CEO Pat Gelsinger's effort to make Intel the technology leader in the chip industry again.

Intel's challenges

The company's plan to become the technological leader by next year is unlikely to come to pass. However, it has made improvements in an attempt to recover the lead it lost to longtime rival AMD.

Also, the company announced the Gaudi 3 Accelerator, an AI chip it hopes can compete with Nvidia. While Intel touts its advantages over Nvidia's Hopper H100 chip, Nvidia has already moved on to the Blackwell B200, likely ensuring that Nvidia will retain its technical lead.

Moreover, Intel will probably continue to struggle financially for the foreseeable future. While its first-quarter 2024 revenue of almost $13 billion rose 11% compared to the same quarter last year, free cash flow was negative $6.2 billion.That's because Intel spent almost $6 billion in Q1 on property and equipment. Since it claims only $21 billion in liquidity, it may have to issue more shares or additional debt if its financials do not improve.

Still, amid a nearly 40% decline in the stock price since the beginning of the year, Intel stock has become a bargain in one critical measure -- the price-to-book value ratio. At just over 1.2 times book value, Intel stock is priced slightly above the value of its stockholders' equity.

In comparison, AMD sells at 4.6 times its book value, and Nvidia trades at a staggering price-to-book value ratio of 62. Hence, Intel's rock-bottom valuation could entice investors to buy Intel stock when one also considers its efforts to compete.

Investing in Intel

Ultimately, government backing and the desire to produce chips in the U.S. should become a tailwind for Intel stock. Admittedly, the company has fallen behind the peers it dominated in past decades.

However, Intel has shown that it will do what it takes to become one of the most advanced chip producers. Also, thanks to the U.S. government's desire for a homegrown chip manufacturing industry, Intel's foundry footprint may make its success critical to the U.S. government, increasing the likelihood it will win in the marketplace.

This means that even if Intel lags Nvidia in the AI chip space, its efforts to close the technological gap could improve its top line in the foreseeable future. With the market valuing the stock at little more than the value of its assets minus liabilities, patient, long-term investors could benefit by taking a position in Intel at current levels.

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Will Healy has positions in Advanced Micro Devices and Intel. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.