Valued

There were some obvious reasons. One is that Mobileye Global
MBLY,
+2.98%
saw its forecast get slashed, and the stock got pummeled. Intel’s significant investment and position in Mobileye certainly impacted its own guidance. Plus, both network and internet-of-things spending has declined. 

While those reasons were noted by investors and analysts, make no mistake, the data-center business is where the alarm bells went off. The growth this quarter was OK, but meanwhile rival Nvidia
NVDA,
+4.97%
is expanding its margin at a breakneck pace, surpassing revenue records and effectively being declared the undisputed champion of AI infrastructure. Intel’s lack of a more optimistic, positive outlook for its data-center solutions built around AI was met with absolute disdain.

Against these challenges, is there a bull case for Intel or has it missed the mark on AI?

Let’s start with AI: 2023 was the year of the graphics-processing unit (GPU), and the undisputed, unquestioned winner was Nvidia. With AI training in demand and the largest cloud providers all investing big on infrastructure to support AI, Nvidia was the only option. Some estimate that Nvidia’s market share of the GPU is as high as 98%, which actually looks Intel-esque from its most successful years when AMD
AMD,
+4.21%
was on the ropes and Intel enjoyed almost a complete monopoly in both the data center and the PC.

Read: Is it a bubble? ‘Magnificent 7’ market cap equals the GDP of 11 major cities.

AI on your PC

But the data center isn’t the only place where AI is going to play a role. A new generation of personal computers is being developed with the intent of creating a brand new supercycle. Many analysts, including myself, expect these to hit the market in the second half of 2024. These PCs will run large-language models that enable data to stay private on the device and be used for generative AI applications without having to interact with the cloud — delivering less latency, more security, and efficiency and putting AI at the fingertips of PC users, much like we’ve become accustomed to with our mobile devices.

The other question is whether the AI market is really that mature, and the answer is: of course, not. These are early days for AI. While the training infrastructure that saw Nvidia stock go parabolic in 2023 was certainly exciting, 2024 will see a focus on implementation. This will be much more about AI inference and applications that are able to combine both generative AI and more traditional machine-learning tactics and techniques to maximize the value of data, whether for consumer applications or enterprise apps.

Intel sits in an excellent position around AI because the company still commands around 75% of the data-center computing market and about the same percentage of the PC market. With the company likely a couple of years out from having a GPU that can compete with what Nvidia and AMD are building, Intel could grow into the AI market and look to take a double-digit percent market share from Nvidia.

Reasons for optimism

Here are specific reasons supporting the bull case for Intel, and the stock’s low valuation, plus the market conditions and the growing need for computing of all types sit well for the company’s long-term prospects.

1. CEO Pat Gelsinger, who has brought back a confidence, a spirit, and a leadership style that bodes well for Intel. He’s made hard decisions; moving the company away from its less-profitable businesses and focusing on strategic alignments as well as mobile. At the same time, he’s worked diligently to make Intel the national fab for the United States — in other words, Intel makes its own chips, and is also aiming to use its facilities to make other companies’ chips too.

2. Long-standing relationships with the channel. This is twofold. First, the channel is highly dependent on Intel from both a design distribution and implementation standpoint. Intel has been one of the most successful companies in terms of building strategic marketing, co-op, and MDF programs that have made partners codependent on Intel to deliver products and margin to the business that is required to be successful.

So long as Intel can deliver competitive products, there is a slow-to-change situation that will remain intact for the time being that I do not see being completely disrupted. Given the company is more on track than it’s been in a long time, the company ceded massive market share to AMD and Nvidia through operational deficiencies and a lack of presence in critical markets. But it seems that over the next few years, most of these items will be course-corrected.

Lastly, and my personal favorite bull case for Intel, is its growing foundry business. Yes, there are reports of delays in multi-year fab construction, but I think those delays are to be expected.

Intel has embraced the opportunity to be the United States and the West’s national foundry. Effectively, of course, the company is committed to its integrated manufacturing strategy. But it is also being looked at by more fabless chip designers here in the U.S. for both nationalistic and strategic reasons to provide supply, and the company has successfully expanded to more than being a process foundry but also a packaging foundry, which has propelled that part of the business to record revenues over the past few quarters.

With uncertainty around China and the need for more supply-chain diversity, there is no other bet for a company that can deliver AI chips partnering with Marvell Technology, Nvidia, Qualcomm, AMD, and others than Intel — not to mention demand for non-AI chips that largely caused the shortage of 2021 and 2022. 

It’s easy to make the bear case for Intel, and there are analysts that will never see a positive for the company. I also could argue every one of these points from the other side. But having said that, there is a bull case. Intel stock is not valued even close to its competition. And the company does still have a really substantial market share and deep ties in its channel that are hard to break. At the very least, this calls for optimism.

Daniel Newman is the CEO and chief analyst at The Futurum Group, which provides or has provided research, analysis, advising or consulting to ServiceNow, Intel, NVIDIA, Microsoft, Amazon, IBM, AMD and other technology companies. Neither he nor the firm have any positions in any of the companies cited in this article. Follow him on X @danielnewmanUV.

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