Could Intel Become the Next Nvidia?

Intel (NASDAQ: INTC) hasn’t been the world’s greatest stock to own. Over the past decade, Intel’s total return (which includes dividend payments) was about 140%. While that may not seem terrible, the Nasdaq-100‘s total return is about 465% over that same time frame.

That’s significant underperformance, and it occurred because Intel has fallen behind on technology. However, Intel may be able to turn it around thanks to a new machine it bought.

So, if Intel can return to the top, could it become the next Nvidia and skyrocket higher? Let’s find out.

Intel has fallen behind other semiconductor companies

The machine that Intel just purchased is a high NA EUV lithography machine made by ASML. Lithography machines allow chipmakers to etch the microscopic patterns on a chip. The distance between these traces determines the size of the chip node. Currently, 3 nanometer (nm) chips are the world’s smallest and are only produced by Taiwan Semiconductor and Samsung.

Intel doesn’t have 3nm or 5nm chip technology. Instead, the best it has is 7nm. This difference puts its products at a significant disadvantage compared to competitors’ products that use these more powerful chips.

But Intel’s latest purchase of this high NA EUV lithography machine will allow Intel to produce 2nm chips and return to prominence in the semiconductor space.

However, the effect may not be as big as expected.

Intel is competing with many companies, but primarily Taiwan semiconductors, on this front. Taiwan Semiconductor is a contract chip manufacturer that makes the chips that Intel’s competitors (like AMD) use. Taiwan Semiconductor even makes some 3nm chips for Intel because it cannot do so.

The relationships are deep within this industry, and if Intel can get its 2nm chips out before others, it may not be enough to supplant itself as king of the semiconductor world. However, this return to prominence may be enough to kick-start momentum in the stock.

The stock isn’t that much cheaper than its peers

Valuing Intel’s stock is difficult from the trailing earnings perspective, as it had a few quarters with negative earnings in 2023.

But, if we value the stock using forward earnings, we can better understand how the market views Intel.

INTC PE Ratio (Forward) Chart

INTC PE Ratio (Forward) Chart

At 31 times earnings, Intel’s stock isn’t that cheap. But that isn’t the full picture. Over the past few years, Intel’s profit margins have fallen off a cliff.

INTC Profit Margin ChartINTC Profit Margin Chart

INTC Profit Margin Chart

If Intel can recover to a 25% profit margin and maintain the revenue it generated in 2023, $54.2 billion, it would produce profits of $13.6 billion. Dividing its market cap by this figure yields an optimized price-to-earnings ratio of 13.

So, if Intel can return to this level, then the stock looks pretty cheap. But does that mean it could turn into the next Nvidia? I’d say no. Taiwan Semiconductor trades at 19 times forward earnings, so even if Intel improved its margin to previous levels, it doesn’t have that far to go before it would be valued the same as Taiwan Semiconductor.

Intel has a lot to prove, and the stock is already assuming success in revitalizing the company. That’s far from certain, making me want to invest in Taiwan Semiconductor rather than Intel.

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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short February 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.

Could Intel Become the Next Nvidia? was originally published by The Motley Fool

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