Intel: We Maintain our $35 Fair Value Estimate Despite Possible Near-Term Gross Margin Softness

We maintain our $35 fair value estimate for no-moat Intel after assessing management’s keynote address and investor question-and-answer session as part of its “Intel INTC Innovation” event. The stock sold off 4% after management commented that gross margins won’t expand by “hundreds and hundreds of basis points next year.” FactSet consensus estimates were calling for over 500 basis points of expansion next year. Such comments may imply modestly worse gross margins than what we’re projecting in 2024 but don’t alter the rebound we are anticipating in long-term adjusted gross margins into the high 50% range by 2027 (albeit still short of Intel’s 60% long-term target). With the selloff, we view Intel’s shares as fairly valued.

Otherwise, we were encouraged by the status update on Intel’s innovation and manufacturing process. The firm’s aggressive goal of achieving five process nodes in four years (ending in 2025) is still on track and remains the most important aspect of Intel’s turnaround, in our view. Intel’s next-generation processor for mobile PCs, codename Meteor Lake, will arrive on Dec. 14, and it will be the first chip on the Intel 4 process node (that is, the second of the five manufacturing processes). Meteor Lake has an integrated neural processing unit to handle on-device artificial intelligence workloads. While most AI chip spending has revolved around training in the cloud, and Nvidia is dominant here, we foresee many smaller AI models eventually shifting to on-device processing, and chips from Intel, Qualcomm, AMD, and others will likely service these models over time. Dec. 14 should also mark the arrival of Intel’s updated server processor, codename Emerald Rapids, on the older Intel 7 process. We view this processor as a bit of a stopgap until two new server processors codenamed Sierra Forest and Granite Rapids, start to arrive in the first half of 2024.