Key Points
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To justify its current stock price, Intel needs to return to its previous high profit margins and continue gaining business.
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A recent deal with Apple could jump-start the chipmaker’s turnaround.
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Intel (NASDAQ: INTC) has had a great run over the past year, rising by around 370%. However, it has sold off in recent days and is now down by more than 25% from its all-time high.
That may be a bit disappointing and concerning for investors, but after the run Intel has been on, it shouldn’t surprise anyone that the stock might need to take a breather. However, longer-term investors won’t be overly concerned about a one-year run; what they will want to know is where the stock might be in five years.
Intel’s stock has risen from the grave, but has its business?
A year ago, Intel was largely being written off in the chip space. Its chip business was losing ground to rivals, and it was struggling to recover the innovative spirit that had defined the company for decades. Additionally, its chip foundry business was struggling to attract new customers and was at risk of being spun off or shut down.
However, after a series of investments from the U.S. government and Nvidia (NASDAQ: NVDA), Intel seems to have regained the investing community’s confidence and trust. As a result, the stock has skyrocketed. But has that been accompanied by real-world successes?
One encouraging sign was that Apple (NASDAQ: AAPL) inked a deal to use Intel as a foundry for some of its chips. Landing that major client boosts Intel’s credibility in the tech community. That could result in big growth for Intel, but the reality is that the stock desperately needs it.
After the run-up over the past year, Intel’s stock trades for about 100 times forward earnings. That’s a very expensive price tag for a company that grew revenue at a 7% pace in its most recent quarter and posted a major earnings-per-share loss.
INTC PE Ratio (Forward) data by YCharts.
Intel will need to achieve significant growth over the next five years to make its valuation more reasonable, and that’s assuming the stock price stays flat. Intel’s primary competitor, Taiwan Semiconductor (NYSE: TSM), trades for 27 times forward earnings. So, Intel would need to quadruple its earnings to trade at the same ratio that Taiwan Semi trades at today. How could it do that?
At its current $550 billion market cap, it would need to generate $20.4 billion in net income to have a trailing price-to-earnings valuation of 27. Intel’s profit margin topped out in 2022 at 32%. If it could return to those levels, it would require $63.7 billion in revenue to generate the net income needed to justify its valuation. Intel has generated trailing-12-month revenues of around $53.8 billion, so it just needs to regain a reasonable amount of additional market share and return to its previous profit levels to justify its current share price.
If Intel can sign big-name clients, expand its relationships with them, and boost its profit margin back to its 2022 highs, Intel’s stock could be a great buy here. There is a huge demand for chip production capacity, and if it achieves those three tasks, I wouldn’t be surprised to see the stock double over the next five years. But until it proves it can do that beyond just one client, I’m a bit skeptical about its future.
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Keithen Drury has positions in Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Apple, Intel, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
