Intel has a huge opportunity in the data center CPU market.
However, the stock’s valuation is high, and competition is increasing.
Next in my series of “bull vs. bear” articles looking at the opposing investment theses of popular stocks, I’m going to take a look at Intel (NASDAQ: INTC). The stock has been on a huge run, up over 350% over the past year and more than 150% year to date, as of this writing.
Let’s see if the stock’s momentum can keep going or if it’s time to pump the brakes.
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After being nearly left for dead last year, Intel’s stock has come roaring back. Things were so dire for the company less than a year ago that the U.S. government made the unprecedented move of investing $8.9 billion in the company’s stock, equal to a nearly 10% stake. At the time, the $20.47 price was below Intel’s then stock price, and the government also received five-year warrants to buy another 5% of the company, exercisable at $20 per share, if Intel retained a controlling interest in its foundry business.
Image source: The Motley Fool.
Shortly afterward, Nvidia invested $5 billion into the company at a price of $23.28 per share, with Intel agreeing to develop custom CPUs that would integrate into Nvidia’s AI architecture. Softbank also invested $2 billion in the company, just ahead of the U.S. government’s buy. These investments, along with the sales of 51% of its Altera business, helped shore up its balance sheet.
This was good timing, as less than a year later, the company now finds itself at the center of the next big trend in the artificial intelligence (AI) infrastructure build-out: high-performance central processing units (CPUs). Intel developed the first CPU all the way back in 1971, and it remains its core chip solution, both for personal computers (PCs) and in data centers.
The stock busted out after Intel’s Q1 results on the back of strong data center CPU demand. The demand for high-performance CPUs is now outstripping supply, which is leading to higher prices and improved gross margins. And this looks like just the start.
Traditionally, for AI model training, there has been an 8-to-1 graphics processing unit (GPU) to CPU ratio in the data center. However, for inference, that ratio falls to 4-to-1, and with the rise of agentic AI, it’s starting to move in favor of CPUs. This is a huge tailwind for Intel moving forward.
Meanwhile, the company continues to build out its foundry (chip manufacturing) business, and it has become a strong player in advanced packaging (integrating logic chips with memory in one unit). If it can continue to improve yields, the company could become a viable alternative to foundry leader Taiwan Semiconductor Manufacturing in the space. It has poured money into investing in this area, and has the assets. It now just needs to execute.
Intel’s sudden turnaround looks more like a case of being in the right place at the right time, more than the company actually actively going out and turning around its fortunes through innovation or big operational improvement. The data center CPU market is a big opportunity moving forward, but before the huge surge in CPU demand, it has been losing share to Advanced Micro Devices in the data center space.
Data center CPU competition is also increasing. Arm Holdings has decided to forgo its traditional intellectual property (IP) licensing and subscription businesses to make physical chips for the first time, targeting this market. Meanwhile, Nvidia has developed its own data center CPUs, which are often packaged with its GPUs, while Amazon and Alphabet also make their own custom CPUs.
At the same time, Intel’s foundry business continues to be a money-losing drain. While it’s making some progress, it’s slow, and last quarter the unit still reported a $2.4 billion operating losses even as revenue rose. This business shows no signs of turning profitable any time soon.
Intel is in a much better place than it was a year ago, but the stock has moved too far, too fast. It now trades at a forward P/E of nearly 86 times, while growing its revenue by just 7% year over year last quarter and guiding for 15% revenue growth at the high end of its Q2 forecast.
I’d be taking profits after this run, as I think there are cheaper and better AI infrastructure plays to own right now.
You can find past “bull vs. bear” articles on Apple, Meta Platforms, Palantir Technologies, Micron Technology, Tesla, and Nvidia by following the links.
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Geoffrey Seiler has positions in Advanced Micro Devices, Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Intel, Meta Platforms, Micron Technology, Nvidia, Palantir Technologies, Taiwan Semiconductor Manufacturing, and Tesla. The Motley Fool has a disclosure policy.
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