Intel (NASDAQ:INTC) has not shown any signs in recent years that it is on its way to a $1 trillion market capitalization. Stagnant revenue from year to year and a lost technical lead left this tech giant far behind peers of the PC era, such as Microsoft, Nvidia, and even Advanced Micro Devices (NASDAQ:AMD).
CEO Pat Gelsinger has instituted changes that could address technical challenges and spawn new lines of business. Nonetheless, Intel will have to show that these changes can return the company to growth before it can consider a future where its market cap exceeds $1 trillion.
The $1 trillion market cap is reachable, but obstacles remain
Interestingly, a $1 trillion market cap for Intel within nine years is not as far-fetched as one might assume. Its current market cap of $220 billion means that it needs to produce approximately 18% stock price growth per year to make it to that milestone by 2030.
Moreover, Intel currently sells for 12 times earnings. According to CSIMarket, the current P/E ratio of the semiconductor industry stands at above 20. This means that matching that multiple takes the market cap to about $370 billion. However, that multiple lags the P/E ratio of key peers. If Intel matched AMD’s multiple of 38, that by itself takes its market cap to around $700 billion. Nonetheless, other than a brief time after the financial crisis, Intel has not consistently sustained a P/E ratio above 35 since the early 2000s.
Stagnant revenue has likely influenced this low multiple. Indeed, Intel still generated five times as much revenue as AMD in the first six months of 2021. However, during the same period in 2020, Intel produced 10 times as much revenue as its rival. Also, other than a brief sales surge during the pandemic, it has struggled to drive meaningful revenue growth for years.
Moreover, the company has also struggled since its development pace slowed in the early 2010s. This allowed longtime rival AMD to capture a technical lead under CEO Lisa Su’s leadership.
Intel has made technical strides recently and now produces more 10-nanometer than 14-nanometer chips. Still, Intel has stated that it will not release its own 7-nanometer Meteor Lake chip until 2023, a massive lag considering that AMD has sold 7-nanometer processors since 2019.
Business lines that could take it to $1 trillion
Despite such challenges, $1 trillion might still be reachable if Gelsinger can institute his changes successfully. At the Intel Accelerated event on July 26, Gelsinger outlined a plan that could spell trouble for Intel’s peers. He stated a goal to catch Taiwan Semiconductor Manufacturing (NYSE:TSM) and Samsung technologically by 2024 and retake the technical lead by 2025.
Additionally, TSMC’s success is one reason Taiwan controls two-thirds of the world’s chip manufacturing, according to TrendForce. This fact alarmed many politicians in Washington, and the U.S. Senate has subsequently passed a bill that included $39 billion in subsidies to build new fabs, funding Gelsinger has openly sought. In a world of chip shortages and limited capacity, such a move could potentially boost Intel’s market share.
Gelsinger has also worked to revive Intel’s foundries independent of subsidies, investing $20 billion in its Arizona facility and $3.5 billion in its New Mexico site. These investments also mean that Intel will build chips for other clients, a business similar to that of TSMC called Intel Foundry Services. Intel Foundry Services also announced that it recruited Amazon‘s AWS as its first client.
Furthermore, Intel may have made the move that could stop its more technologically advanced peers in their tracks. Chinese media outlet UDN reported that Intel bought TSMC’s remaining 3-nanometer chip production capacity. While Intel will devote this capacity to GPUs and server chips instead of consumer market CPUs, it could hamper the ability of AMD and Apple to increase capacity, as neither company currently operates fabs of its own.
Is $1 trillion by 2030 possible?
Intel’s lost technical lead and flat revenue growth left it with a low multiple and a market cap far below $1 trillion. However, increased foundry capacity, an initiative to catch up to peers technologically, and significant control over 3-nanometer chip production could bode well for Intel over the next few years. Such competitive moves do not guarantee the needed 18%-plus annual stock price increases. Nonetheless, if these businesses help Intel boost earnings and by extension boost its P/E ratio, a $1 trillion market cap by 2030 for this chip stock is a reachable goal.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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