Is now the time to buy the Dow’s worst performing stock?

Key points

• Intel stock is down 61% YTD, making it the worst performer on both the Dow and the Nasdaq 100.

• The chipmaker had a subpar Q2 and its outlook for Q3 was below estimates.

• Can its transformation plan turn things around?

Pioneering chipmaker Intel has fallen on hard times in recent months, as its stock is down 61% YTD.

Semiconductor chip maker Intel (NASDAQ: INTC) has had a brutal year, as it stock price is down a whopping 61% year-to-date, making it the worst performing stock on both the Dow Jones Industrial Average and Nasdaq 100.

This pioneering semiconductor firm is still the dominant player for making CPU (central processing units) chips for personal computers and laptops. But it has lost market share in CPU chips to AMD (NASDAQ: AMD) and others, and fell way behind in AI chips to NVIDIA (NASDAQ: NVDA), who dominates in the GPU (graphics processing units) market, particularly for data centers.

At the start of 2024, Intel stock was trading at around $50 per share and it is now below $20 per share, trading at around $19.60 as of August 28 — its lowest price in more than a decade. Is now the time to buy Intel stock?

A difficult summer

Intel’s sharp drop in price has come mostly since August 1, when it released its second quarter earnings. Revenue fell 1% year over year to $12.8 billion and well short of the $12.9 billion analysts had expected.

Earnings were much worse, as the company had a $1.6 billion net loss, or -38 cents per share, down from $1.5 billion in net income, or 35 cents per share, in the second quarter of 2023. Adjusted earnings were 2 cents per share, down from 13 cents per share in the same quarter a year ago and significantly below the adjusted 10 cents per share estimates.

Earnings were dragged down by high expenses, which jumped 15% year over year to $6.5 billion, due mainly to higher research and development for the ramp up of its new AI PC chips.

Not only did Intel have a weak quarter, its outlook for the third quarter was worse than analysts had anticipated.

In Q3, Intel calls for revenue in the range of $12.5 billion to $13.5 billion, which is $1.2 billion below the same quarter a year ago and roughly that much below estimates. Also, the gross margin is expected to fall to 34.5%, from $35.4% in Q2, while earnings while the losses per share is expected to be 24 cents. On an adjusted basis, Intel projects a 3 cents per share loss, worse than the adjusted 2 cent per share gain in Q2.

Intel CEO Pat Gelsinger called the Q2 financial performance disappointing, adding that “second half trends are more challenging than we previously expected.”

These challenges forced Intel to suspend its dividend starting in the fourth quarter to focus on investments needed to execute its multiyear transformation strategy.

Transformation plan

The lackluster performance this year led Intel leadership to launch a series of transformational initiatives. It starts with a cost reduction plan that aims to reduce expenses by $10 billion in 2025 with further reductions in 2026. Intel seeks to reduce staff by 15%, reduce operating and capital expenditures, and realign and streamline its operating structure.

Much of the strategic investments will be focused on its foundry business, which means manufacturing chips for other companies.

Earlier this year, Intel launched Intel Foundry, a new systems foundry designed for the AI era. Intel Foundry’s roadmap seeks to establish leadership in the space in the latter half of this decade, challenging the foundry leader, Taiwan Semiconductor (NYSE:TSM).

The questions for investors are: Has Intel stock hit bottom and how long will it take to execute upon this long-term transformation?

Is Intel stock a buy?

The outlook, at least in the near term, is not promising, but Intel’s strategic investments should benefit from lower interest rates and federal grants from the Chips and Science Act.

Analysts have established a median price target of $27 per share for Intel, which would suggest a 27% increase over the next 12 months.

The concern is its valuation, as it has a forward P/E ratio of 78, based on the projected slow earnings growth.

There still could be difficult days ahead for Intel over the next couple of quarters, but I do think it is making the right moves and I like its long-term prospects.

Bargain hunters looking to get a cheap stock with lots of upside could find it in Intel stock. I just wouldn’t buy it yet, as the valuation is still high and the stock price could still go lower in the near term.

But keep Intel stock on your radar, and watch for progress over the next few quarters on its transformation.