After Intel's historic stock drop, analysts say there's no reason to buy the dip

By Britney Nguyen

'A cheaper stock does not necessarily offer better value,' one expert says

Intel, led by CEO Lip-Bu Tan, disappointed investors with its latest forecast.

Even in the wake of what could be Intel's worst daily stock drop in decades, some analysts say investors should steer clear.

"A cheaper stock does not necessarily offer better value," Dan Kemp, founder of investment consultancy Portfolio Thinking, told MarketWatch.

Intel's (INTC) earnings report on Thursday afternoon shed light on various problems, including a dramatically weakening market for personal-computer chips and a server business that's leaving money on the table because it can't meet all its demand. Intel is also losing money on an expensive chip-manufacturing business that remains a work in progress.

Seaport Research analyst Jay Goldberg thinks that Intel "will sort itself out" eventually, but its comeback "is taking too long."

The company's current challenges, which partly stem from poor foresight into market conditions that has left the company without enough manufacturing capacity for its critical AI server chips, have put a dent in the turnaround efforts undertaken by CEO Lip-Bu Tan.

Goldberg, who just lowered his rating on Intel to neutral from buy, said he sees "no reason to own the stock" as the company works through its issues.

Intel's 29% stock drop as of midday Friday puts it on pace for its worst one-day decline since at least 1980, according to Dow Jones Market Data. It also draws flashbacks to August 2024, when Intel shares shed 26% in a single day upon suspending its dividend and beginning a massive cost-cutting program.

To the company's credit, Intel is in better shape than it was two years ago, Goldberg said. Its chip-manufacturing technology is gaining traction with customers and producing better yields, he said, referring to the amount of usable chips that come from a single wafer. The commentary around its chip-manufacturing business "gives us further confidence that Intel Foundry will be viable, some day," Goldberg said in a note to clients.

That prospect alone may not be reason to buy into Intel's stock now, however.

Intel on Thursday said that persistent weakness in demand for PCs, spurred by rising memory prices, was partly to blame for a forecast that came short of what analysts had been expecting.

There are also constraints throughout its supply chain, the company noted, including for chip wafers and packaging substrates - an essential component for its advanced chip packaging technology that is gaining appeal with customers.

Intel had indicated the previous quarter it was getting back on track with supply, Goldberg said - but the third-quarter results showed that hasn't happened.

While Intel has upped production of client wafers for the PC market, which "is seeing its worst downturn" in more than a decade, it is facing shortages of wafers for data-center server central processing units to support an artificial-intelligence market that "is seeing its greatest cycle ever," he noted.

"Where they really lost us was management's commentary that supply would not come into balance until the middle of next year," he said, also noting that Intel said its investments in long-term assets to benefit the business could weigh on its cash flow, or the money it generates after that spending and operating expenses.

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Although the stock's steep drop on Friday follows its less-than-stellar report, it also has to do with investors realizing "the size of the mountain Intel must climb over the next decade to justify its previous valuation," Portfolio Thinking's Kemp said.

At Intel's current valuation, the market needs Intel Foundry to bring in $14 billion a year, Kemp said - a high mark for a business that has lost money for several consecutive quarters and generated external revenue of just $411 million in the September quarter.

While the selloff could look like a bargain to some investors, Kemp said its important to distinguish between that and a discount.

Indeed, Intel shares now trade at 35.9x estimated forward earnings, down from 43.8x heading into the report on Thursday, according to Dow Jones Market Data. But the earnings also made investors call into question trends like its ability to capitalize appropriately on a wave of demand for server CPUs, something that had previously helped drive its valuation higher.

Richard Windsor, founder of research firm Radio Free Mobile, shared similar caution about the stock given his view that while Tan has made progress on a turnaround, "he is not out of the woods yet."

The stock's high valuation, Intel's weak projections for next year and the ongoing debate over the dominance of its x86 chip architecture "leaves me cautious on the shares," Windsor said in a note to clients.

Bank of America analyst Vivek Arya also lowered his rating on Intel's stock to neutral from a previous buy position.

Intel's PC weakness "more than" offsets the strength it is showing in its data-center and AI segment, Arya said in a note to clients.

And even as it benefits from AI-driven demand for server CPUs, Intel faces component-supply issues there, while its offerings "are not yet technically competitive" with those from CPU rivals Advanced Micro Devices (AMD) and Arm (ARM), according to Arya.

-Britney Nguyen

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10-30-26 1245ET