Intel Is Turning Its Foundry Business Into a Subsidiary. Time to Buy? | The Motley Fool

The brutal sell-off in Intel (INTC -3.29%) stock may finally be over. The stock seems to have resurged on news that the company plans to turn its foundry business into a subsidiary. It also expanded its deal with Amazon, inking a new agreement to produce artificial intelligence (AI) chips for Amazon Web Services (AWS). That could transform it into a major player in the AI server chip market.

Nonetheless, considering the stock’s performance in recent months, one could question whether this recent bounce is a sign that a sustainable recovery for Intel is coming, or if investors should continue to avoid the stock.

Intel’s new lease on life

Without a doubt, Intel has fallen into decline, and its attempted return to prominence under CEO Pat Gelsinger has not gone as planned. The company made ambitious plans to spend tens of billions on new foundries to create a third-party chip manufacturing business that could compete with Taiwan Semiconductor Manufacturing (TSMC) and Samsung.

It also made technical improvements and boldly claimed that it would return to process leadership by 2025. However, its planned $25 billion to $27 billion in capital expenditures over the next year will take a considerable toll on its balance sheet. Also, multiple sources told Reuters that chips Intel produced for Broadcom failed that company’s tests, calling into question how well Intel can compete in that business.

The fact that Intel suspended its dividend and is laying off over 15% of its workforce shows that it has fallen well short of its goals. That news in August sent the stock to multiyear lows.

Yet its foundry business has shown potential for improvement. Intel will turn that business into a separate subsidiary, giving it its own operating board and the ability to raise capital separately. Additionally, the aforementioned deal with AWS could help make Intel’s foundry business a top company in its industry.

Intel stock’s new investment thesis

Intel’s stock was down by about 60% year to date prior to this latest bounce. In that context, the investment thesis for Intel has arguably become compelling for one key reason: valuation. However, its P/E ratio of 93 does not reflect this.

By contrast, its price-to-sales (P/S) ratio is just under 2, far below the 11 P/S ratio of rival AMD. The undervaluation is especially apparent in its price-to-book-value ratio of less than 0.8. This means the market has valued Intel at more than 20% below the value of its assets minus its liabilities. That level is likely far too low for a company that remains a major chip developer and producer.

At the same time, investors have many choices when it comes to semiconductor stocks. As Intel has lost value, stocks like AMD, Qualcomm, and Nvidia have delivered market-beating returns as they find customer bases in the AI chip market. Investors have to ask themselves whether the bargain in Intel stock is worth pursuing when considering the clearer opportunities offered by Intel’s competitors.

Investing in Intel stock

Investors who choose to buy Intel stock should likely limit their exposure to small, speculative positions.

The company’s valuation does make the stock look like a compelling bargain, assuming it can raise more outside funding and successfully produce Amazon’s AI chips. However, the chip industry is in a period of significant secular growth thanks to the AI trend, and many of Intel’s peers have experienced considerable share price increases as its stock has fallen. Also, the setbacks in its Broadcom deal raise questions as to whether it will be able to execute on its plans to deliver new high-end chips. That highlights the risks that come with speculating on Intel’s recovery.

Ultimately, Intel stock could be at the beginning of a long-awaited resurgence, but until the company can successfully address more of the uncertainties surrounding its business, investors should buy shares cautiously if they buy them at all.