Intel Misses – Opportunity or Risk for Investors?

Intel has significantly missed analysts' expectations with its latest quarterly report. CEO Pat Gelsinger expressed disappointment over the chip manufacturer's performance. The market responded promptly, and the stock plummeted by 30% within a single trading day. At the same time, the company forecasted a weaker phase and announced drastic cost-cutting measures amounting to ten billion dollars, including substantial workforce reductions. Intel, lagging in the race for Artificial Intelligence (AI), pursues ambitious goals. The plan is to gain market share in the AI sector and rise to become the world's second-largest contract chip manufacturer by the end of the decade. However, the recent report raises the question of whether these developments are warning signs for investors or necessary steps to foster long-term growth. Background: Nvidia invested in AI early on and now dominates the AI chip market with an 80% share. In contrast, Intel, the giant for central processing units (CPUs), struggles to keep up in this growing area. While Nvidia's annual revenue has soared in recent years, Intel is on a downward trajectory. To reverse this trend, Intel focuses intensively on AI, which includes introducing several new products and tapping into the market for AI-enabled personal computers. Additionally, the company opened its semiconductor business to third-party providers, aiming to lead in this field soon. However, it is clear that this transformation process will not succeed overnight, and the company has several hurdles to overcome. In the second quarterly report, Intel reported a revenue decline of 1% to $12.8 billion and an adjusted earnings per share of $0.02—both figures fell short of analysts' estimates. Intel stated that the disappointing performance was due to a strategic decision to accelerate the production of its Core Ultra AI-CPUs. For instance, the production of Intel 4 and 3 wafers was moved from Oregon to a facility in Ireland, which incurs higher short-term costs but is expected to improve the gross margin once scaling is achieved. The company also anticipates ongoing operational losses in the third quarter, as a significant portion of wafer production comes from older, less cost-efficient processes. As part of its restructuring program, Intel plans to reduce its workforce by 15% and suspend dividend payments starting in the fourth quarter. But is the stock now a sell candidate or a growth opportunity? A price drop is certainly not surprising when the company presents so much bad news to investors at once. The next few years could be rough for Intel as it restructures its cost structure and invests in growth, while managing the short-term impact on earnings. Nonetheless, acceptance of disappointing short-term results could lead to substantial gains in the future. The market share of AI personal computers, currently below 10%, is projected to rise to over 50% by 2026. Additionally, Intel's transition to new production processes is likely to alleviate margin pressures. Furthermore, Intel maintains its forecast that the foundry business will break even by 2027. In summary, Intel must navigate a tough but necessary phase to achieve its goals. Such times involve considerable risk, making the stock less suitable for cautious investors at present. However, Intel could succeed in the long run, and the stock price may follow suit. In this context, an aggressive investor might consider buying some Intel shares and holding them for at least five years—assuming Intel achieves its goals, this early investment could prove to be worthwhile.