Can Intel Stock Recover In 2023? No, Be Prepared For A Longer Wait (NASDAQ:INTC)

Elevator Pitch

I have a Hold rating assigned to Intel Corporation’s (NASDAQ:INTC) stock.

I discussed how INTC will be impacted by Mobileye Global’s (MBLY) public listing with my earlier October 25, 2022 write-up. In this latest update for Intel, my attention is on the stock’s 2023 outlook.

I anticipate that Intel’s 2023 financial performance will be better than what it achieved in 2022. But I think that it is a stretch to hope for a substantial share price recovery based on INTC’s expected flattish bottom line growth this year. However, Intel has a decent chance of turning around its business in the next few years, and I am positive on INTC’s intermediate-to-long-term prospects. Taking into account the above-mentioned factors, I maintain my Hold rating for Intel.

Why Has Intel Stock Dropped In 2022?

2022 was a year to forget for Intel’s shareholders, as INTC’s share price halved in the previous year. In contrast, the S&P 500 corrected by a more modest -20% over the same period.

Intel’s absolute and relative stock price underperformance for 2022 is justified on the basis that the company ceded market share to Advanced Micro Devices (AMD) in the server CPU segment and its overall profitability has been deteriorating. In the next section, I make reference to specific metrics which provide evidence for INTC’s share loss and profit margin decline.

INTC Stock Key Metrics

INTC’s failure to compete effectively with AMD in the server CPU market and sustain its profit margins has disappointed the market as per key metrics outlined below.

According to data sourced from Mercury Research, Intel’s share of the x86 server CPU market contracted by -13.5 percentage points YoY and -4.9 percentage points QoQ to 72.2% for the third quarter of 2022. It is startling to know the extent of market share erosion for Intel in this market for the past three years. In Q3 2019, Intel boasted a dominant 96.0% share of the x86 server CPU segment. But AMD’s market share in the server CPU market has since expanded significantly from 4.0% in Q3 2019 to 27.8% in Q3 2022.

Separately, INTC’s profit margins are on the decline. Intel’s non-GAAP adjusted gross profit margin decreased by -12.4 percentage points from 58.3% for Q3 2021 to 45.9% in Q3 2022, as per its most recent 10-Q filing. As per S&P Capital IQ’s financial data, the normalized net profit margin for INTC also declined by -22.8 percentage points from 38.7% to 15.9% in the same time frame. Intel’s profit margins have compressed due to negative operating leverage, and the need to incur capital expenditures to stay in the process technology race.

What Do Analysts Think Of Intel?

A positive change in analyst sentiment is typically a key re-rating catalyst for stocks. As such, it is relevant to look at how the sell-side’s view of Intel as a potential investment has changed in recent times.

The mean Wall Street analyst rating (5 and 1 refer to Strong Buys and Strong Sells, respectively) for Intel fell significantly from a one-year high of 3.17 in late-February 2022 to 2.98 as of January 11, 2023. Notably, INTC’s average sell-side analyst rating was slightly higher at 3.02 in end-November last year, suggesting that there were some analyst rating downgrades in the past month and a half.

In a nutshell, analyst sentiment for INTC remains weak, and analysts in general have become slightly more negative on Intel in recent months.

Is Intel Going To Recover In 2023?

INTC should deliver a better set of financial results this year, but the company’s bottom line growth for 2023 is expected to be modest on an absolute basis. Therefore, I don’t think that there will be a meaningful recovery in Intel’s share price in the current year, and this is supported by the consensus price targets for the stock.

The market’s consensus financial forecasts sourced from S&P Capital IQ point to Intel’s revenue decline narrowing from -15.0% for fiscal 2022 to -2.8% in FY 2023. Analysts also project that INTC will turn around from a -64.3% normalized EPS contraction in the prior year to generate a positive bottom line increase of +0.5% for this year.

I am of the view that Intel is able to meet the sell-side’s consensus expectations relating to its 2023 financial performance. There should be an improvement in INTC’s 2023 financial results, thanks to this year’s aggressive expense savings target of $3 billion and the introduction of Sapphire Rapids to the market. INTC referred to Sapphire Rapids as “4th Gen Intel Xeon Scalable processors” in its January 10, 2023 press release.

I don’t think that flattish earnings growth for 2023 is sufficient to push up Intel’s stock price this year. It is also worthy of note that the median analyst price target for INTC is $29.50 as per S&P Capital IQ data, and this is just below its last traded share price of $29.85 as of January 11, 2023. In other words, the sell-side has a dim view of INTC’s 2023 share price outlook.

In conclusion, I don’t see Intel’s stock price recovering in 2023.

Is INTC Stock A Good Long-Term Investment?

I have a favorable view of Intel’s prospects for the long run.

Firstly, INTC’s competitive position is still strong in the client market or desktop/notebook CPU segments. At Credit Suisse’s (CS) 26th Annual Technology Conference on November 30, 2022, Intel stressed that “on the client side, we always have the leadership in terms of technology”, and this is reflected in recent metrics. As per Mercury Research data, INTC’s market share in the x86 desktop CPU market expanded by +4.6 percentage points YoY and +6.8 percentage points QoQ to 88.0% for the third quarter of 2022. The company’s share of the notebook CPU segment also increased by +1,490 basis points QoQ and +430 basis points YoY to 88.1% in Q3 2022.

Secondly, Intel is in a position to realize substantial cost savings over the next couple of years. INTC guided at CS’ 26th Annual Technology Conference that it is confident in achieving yearly expense reductions of between $8 billion and $10 billion by 2025. Notably, Intel emphasized that the company’s pivot to an internal foundry model will help it realize half of its targeted expense savings.

Thirdly, INTC will become a much more attractive investment candidate, when it initiates a huge dividend hike and boasts a higher dividend yield in the future. Consensus financial figures (source: S&P Capital IQ) suggest that this could happen in 2026. Intel’s annual dividend per share is forecasted to jump by +12.4% from $1.58 in 2025 to $1.77 in 2026, which translates into a forward FY 2026 dividend yield of 5.9%. This expected timing of a substantial dividend increase makes sense, as INTC’s cost structure will be leaner after 2025 as outlined above.

Bottom Line

A Hold rating for Intel is the most appropriate. A Buy isn’t justified, since I don’t think that INTC’s expected financial performance for 2023 warrants a major recovery in its share price. On the other hand, it is too harsh to assign a Sell rating to Intel, as the company has the potential to achieve a successful turnaround in the medium to long term.