Have Patience, Intel Investors! Why Payoff May Not Come Until 2025.

Once Pat Gelsinger returned to Intel (NASDAQ:INTC) as CEO in 2021, I went from being an INTC stock bear to an Intel bull.

After watching INTC stock flail for two decades with marketing in the lead, I liked seeing an engineer back in charge. Even better was his vision, to make Intel a chip maker again.

Having studied Moore’s Law for most of my life, I knew that manufacturing margins are thinner than those in design. I just knew that chip manufacturing needed to come home, and Intel was the only company that could make that happen.

I backed my words with cash, and I’ve lost about one-third of it. Intel has traded as low as the mid-20s under Gelsinger and opened August 3 at about $34.50 per share. How much patience is too much?

A Closer Look at INTC Stock

My son and I disagree on this. He says the CHIPS and Science Act is a subsidy for billionaires. That may be true. But without it, you can’t make the numbers work for American chip manufacturing.

That’s because chip fabrication is a dirty business, with high labor costs and immense capital expenses. China paid workers a pittance, ignored the environment, and won the market. Now that it’s clear how vital semiconductors are to competitiveness, I think we need to win some of it back.

Without Gelsinger’s investments, I wonder where the whole economy would be right now. Intel’s investments in property were $90 billion at the start of July, up $10 billion in just six months. It now has over $46 billion in debt, against a market cap of $144 billion.

When do we see a return?

The Timeline

Intel surprised observers with a small profit in the second quarter. But foundry profits are two years away.

Intel will start breaking out manufacturing results early next year. The company hopes its control over the process will result in operating margins of 40%, in line with its 20th century heyday. It expects to master the extreme ultraviolet technology pioneered by Taiwan Semiconductor (NYSE:TSM) in 2025, delivering chips with lines 18 Angstroms apart. That’s less than 2 nanometers.

Besides its Ohio investments, Intel is also expanding in Oregon and China. As China floods the market with cheap chips, circuit lines 28 nm apart, Intel will push up-market with circuits more than 10 times closer.

Meanwhile, the company’s efforts in telecom chips are paying off with market share. Trouble is, this comes just as wireless companies cut back on spending.

There are more tailwinds than headwinds, as the analysts call them. But that wind is still a zephyr right now. Analysts expect sales growth of just 11% next year, although their hopes for profit are high. Hit the mean estimate of $1.59/share in earnings and you have a forward price to earnings multiple of 21.6.

The Bottom Line

As I wrote in late July, shortly before Nvidia’s (NASDAQ:NVDA) $35/share fall, chip investors need to diversify. You can’t just bet on designers. You need exposure to manufacturing as well.

Intel provides that.

What’s true for a small investor is also true, in my view, for the nation. We’re barely a decade into the cloud era.

As of this writing, Dana Blankenhorn held LONG positions in INTC, NVDA, and TSM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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