Intel Stock: Foundry Breakup Could Unlock Value, We're Bullish

Intel's Current Challenges - Intel's stock has lost more than half its value in 2024, driven by weak Q2 earnings and poor management guidance [1] - The company has faced execution failures, including slow response to AMD's rise in the consumer x86 CPU market and Apple's transition to in-house chip design [2] - Intel's lack of vision in recognizing the potential of AI has allowed NVIDIA to gain a significant lead in AI-optimized chips [3] Financial Performance in Q2 2024 - Intel reported Q2 2024 revenue of $12.8 billion, down 1% year-over-year, with adjusted EPS of $0.02, missing estimates by $0.08 [4] - The Intel Foundry segment contributed to earnings weakness, with a firm-wide operating margin of just 0.2%, down from 3.5% in Q2 2023 [4] - Net income attributable to Intel was a loss of $1.6 billion, compared to a profit of $1.5 billion in Q2 2023 [6] Cost Reduction and Restructuring - Intel plans to reduce costs by over $10 billion by next year, including a 20% cut in capex and a 15% or greater headcount reduction [5] - The company is suspending its dividend starting in Q4 2024, which will save $2 billion in cash next year [5][10] - Intel is considering strategic options, including selling or spinning off its foundry business, to improve profitability and focus on core product groups [10] Strengths and Product Portfolio - Intel's Client Computing Group (CCG) generated $7.4 billion in revenue in Q2, exceeding expectations by 9% year-over-year [7] - The company is on track to ship over 40 million "AI PCs" by year-end, with the Lunar Lake processor series launched ahead of schedule [7] - Intel's Data Center and AI (DCAI) unit posted a modest 3% decline in revenue, with new product launches expected to drive a rebound [7][8] Future Outlook and Strategic Moves - Intel's Sierra Forest Xeon 6 processor is set to begin shipping in September, and the Gaudi 3 AI accelerator is expected to compete with NVIDIA's offerings [8] - The company generated $8.2 billion in free cash flow last quarter and has $11.3 billion in balance sheet cash, providing flexibility to manage its $48 billion debt [10] - A potential sale or spin-off of the foundry business could unlock value and align Intel's core product groups with the successful models of competitors like AMD and NVIDIA [10] Stock Price and Valuation - Intel's stock is rated as a buy, with a potential upside target of $30.00 over the next year, driven by reset expectations and underlying strengths [11] - The company is expected to generate positive free cash flow, with consensus EPS estimates of $1.22 by next year, implying an 18x forward P/E ratio [11]